U.S. service sector grew at slower pace in February

Rebecca Wilcomb, chef de cuisine at Herbsaint Restaurant in New Orleans, plates braised short rib with potato rosti and horseradish cream.

WASHINGTON  — U.S. service companies expanded more slowly in February as hiring levels declined in a cautionary sign for the economy coming out of winter.

The Institute for Supply Management said today that its service-sector index fell to 51.6 from 54 in January. Any reading above 50 indicates expansion.

But the harsh winter weather posed challenges. The real estate, retail, hotel, food services and construction industries all contracted last month. And a measure for hiring plunged 8.9 percentage points to 47.5, evidence that many companies shed workers. It raises concern that the February jobs report the government will release Friday could disappoint.

“Risk of a Friday shock has risen,” concluded Ian Shepherdson, chief economist for Pantheon Macroeconomics.

The trade group’s survey covers businesses that employ 90 percent of the workforce, including retail, construction, health care and financial services firms.

Anthony Nieves, head of ISM’s services survey, said comments from businesses indicate that snow and freezing temperatures held back employment.

Several companies were “pulling the reins back,” Nieves said. “Weather has come into play a bit.”

Despite the downturn in employment, measures for new orders and production in the index both point to continued expansion.

“Economy still plugging along, but at a very slow rate of growth,” said one firm interviewed for the survey.

Many recent economic indicators have pointed to weakening momentum. A survey by payroll processor ADP showed that private U.S. companies added slightly more jobs in February than in January, though harsh winter weather still weighed on hiring.

The government said the economy grew at a 2.4 percent annual rate in the October-December quarter, down sharply from an initial estimate of a 3.2 percent rate.

The service-sector survey often parallels consumer spending, but that measure has recently become mixed due to higher home heating bills.

Consumer spending rose 0.4 percent in January after a 0.1 percent gain in December, according to the government. But much of that increase came from spending on home heating, which surged at its fastest pace since October 2001.

U.S. manufacturing has started to recover from a winter that delayed shipments of raw materials and caused some assembly lines to stop. The ISM said in a separate report this week that its manufacturing index rose to 53.2 in February from 51.3 in January. The increase only partly reversed a five-point drop in January from December.

All of that has lowered expectations about how many jobs the economy added in February, with the consensus view of economists at 145,000. That would be a modest improvement from gains of 113,000 and 74,000 in the previous two months. But it remains below the monthly job creation average of the past two years of more than 180,000.