Ahead of the Bell: US services index

AP News
Posted: May 03, 2012 6:21 AM
Ahead of the Bell: US services index

U.S. service companies likely expanded at a slower pace in April after consumers reined in their spending a bit.

Economists forecast that the Institute for Supply Management's non-manufacturing index declined to 55.5 from 56 in March, according to a survey by FactSet. Any reading above 50 indicates expansion.

The report will be released at 10 a.m. Eastern time on Thursday.

The ISM's survey covers roughly 90 percent of U.S. companies in all sectors outside of manufacturing. That includes retail, construction, financial services, health care, and hotels.

The index reached the highest point in a year in February, when it was 57.3. Consumers stepped up their spending that month at the fastest pace in seven months.

And in the first quarter, Americans increased their spending at the fastest pace in a year. But most of those gains were in January and February. Consumer spending gains slowed in March. And Americans were forced to dip into savings in order to spend more, a trend that economists worry isn't sustainable.

Americans are spending more on goods, such as cars and appliances, but are holding back when it comes to services. A government report Monday showed that spending on services was flat in March.

The job market is improving, but incomes are barely growing. That could weigh on consumer spending in the coming months, dragging on the services sector.

Manufacturing has been the driving force behind the economic recovery. Economists would like to see services firms contribute more. On Tuesday, the ISM said that the manufacturing sector expanded at its fastest pace in 10 months. Measures of new orders, production and employment all rose. But manufacturing accounts for only about 12 percent of U.S. output.

Services firms need to step up hiring to accelerate job gains and rapidly push down the unemployment rate. The service sector includes low-paying positions in retail and restaurants. But it also has higher-paying jobs in professions such as information technology, accounting and financial services.

The government will release the April employment jobs report on Friday. Economists are predicting that employers added 163,000 jobs, and the unemployment rate will remain 8.2 percent.

Some recent reports have heightened concerns that hiring is slowing. Payroll provider ADP said Wednesday that job gains in the private sector fell sharply in April compared to the previous month. Still, the ADP report has deviated from the government's figures in the past and isn't always a reliable indicator.

The number of people seeking unemployment benefits has also risen in the past month to a three-month high. That suggests layoffs are rising. Economists hope to see benefit applications fall when the Labor Department issues its next weekly report, also on Thursday.