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Published: Wednesday, 7/6/2011

Services growth slows, but silver lining in jobs

REUTERS

NEW YORK — Growth in the U.S. economy’s vast services sector remained sluggish in June as new orders fell, but economists said a steady employment reading pointed to job growth later in the year.

Wednesday’s picture of labor market conditions in the Institute for Supply Management’s services sector data comes two days ahead of a key U.S. jobs report that is expected to show non-farm payrolls rose modestly last month after slumping in May.

Analysts are watching closely for signs the economy is gaining traction after growth slowed in the first six months of 2011, and many are looking for acceleration in the later part of the year.

John Silvia, chief economist at Wells Fargo, said that while the services data was weaker than expected, it was still consistent with continued economic growth in the second half of the year.

“The silver lining is that the employment index remained in expansion territory,” Silvia wrote in a note. “This reading suggests prospects for continued payroll growth in the coming months.”

The ISM report’s services index fell to 53.3 last month from 54.6 in May. The reading was shy of economists’ forecasts for 54.0, according to a Reuters survey. A reading above 50 indicates expansion in the sector.

The dip comes after a modest gain in May, and the index is still well off the peak seen at the beginning of the year.

The new orders component eased to 53.6 from 56.8, while the employment gauge improved slightly, edging up to 54.1 from 54.0.

Gains in employment are key to bolstering consumer confidence, and even though the employment gauge held up this month, it needs to be higher, said Anthony Nieves, chairman of the ISM non-manufacturing business survey committee.

“People are still out of work. Companies are adding some positions back in, but overall, people are still trying to find their way,” Nieves told a teleconference.

Despite the bright spot on the jobs front, Chris Low, economist at FTN Financial, said the index did not yet signal the economy has overcome recent weakness.

“The small decline in June is a reminder that while the economy may be stabilizing at a slower rate of growth, there is little evidence of reacceleration,” said Low.

Treasuries prices rose after the data, and there was little move in U.S. stocks as investors focused on renewed worries over the euro zone’s sovereign debt crisis and an interest rate hike from China.

The ISM report echoed data from Europe Tuesday that showed services growth slowed last month in the face of sluggish new orders and rising interest rates.

Friday’s key U.S. non-farm payrolls report is forecast to show the economy created 90,000 jobs in June compared to a scant 54,000 the month before.

A report on U.S. private sector employment Thursday is also expected to show a gain of 68,000 jobs.

A separate report Wednesday gave a cloudier picture of the labor market as the number of planned layoffs at U.S. firms increased for the second month in a row in June, though downsizing in the first half of the year was at the lowest level since 2000.

The latest data on the housing market was also mixed as purchase applications for U.S. home mortgages rose last week, but refinancing activity plunged as interest rates jumped, according to the Mortgage Bankers Association.



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