Slower U.S. services growth signals subdued economy

WASHINGTON – The slowest going in 13 months for service providers including retailers and restaurants indicates a weaker pace for the U.S. recovery from a first-quarter contraction.

The Institute for Supply Management’s non-manufacturing index declined to 55.7 from April’s 57.8, the Tempe, Ariz.- based group said Wednesday. The May gauge was weaker than the median forecast of 57 in a Bloomberg survey of economists.

Fewer purchasing managers reported gains in orders at the same time service-related employment eased, underscoring a tempered economy as American consumers save rather than spend and companies limit investment. Even with the decline in May, the ISM’s gauge is hovering close to the average for all of 2014, when the economy grew 2.4 percent.

“It’s consistent with the view that consumer spending has slowed somewhat,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, whose ISM forecast was the closest among economists surveyed by Bloomberg. There will be “a rebound in growth this quarter, but one that is fairly subdued,” he said.

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Another report Wednesday showed trade will probably be less of a detriment to the U.S. economy. The trade deficit, which depressed gross domestic product in the first quarter, shrank 19.2 percent to $40.9 billion in April, according to the Commerce Department. The March shortfall of $50.6 billion was the worst in more than three years.

Second quarter

“The trade gap returned to more normal levels after an inordinately large increase,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who projected the deficit would shrink to $39.5 billion. “That starts off the second quarter on a reasonably positive note.”

With the economy projected to rebound this quarter, employers are still adding to headcounts. Companies took on 201,000 workers to payrolls in May after a 165,000 increase a month earlier, according to a Roseland, N.J.-based ADP Research Institute report on Wednesday.

“As businesses continue to grow, they need to hire additional labor to fill those new orders for goods and services that are continuing to come in the door,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit.

A June 5 Labor Department report is projected to show a 227,000 increase in May employment after a 223,000 advance, according to the Bloomberg survey median. The unemployment rate is forecast to hold at 5.4 percent, the lowest since May 2008.

Stocks advanced, after falling for the third time in four sessions, on speculation Greece will reach a deal with its creditors. The Standard & Poor’s 500 Index added 0.2 percent to 2,114.07 at the close in New York.

By industry

Arts and entertainment, real-estate firms and rental companies led the list of the 15 non-manufacturing industries that reported growth in May. Mining, which includes oil extraction, contracted.

Estimates in the Bloomberg survey of 79 economists for the ISM non-manufacturing index ranged from 55 to 60. Readings above 50 signal expansion in the industries that make up almost 90 percent of the economy. The survey covers a broad base of service providers that also include utilities, retailers and health care companies, in addition to construction firms and farms.

The ISM’s new orders gauge fell to 57.9 in May from 59.2 a month earlier, while the index of backlogs slumped to the lowest level since December 2013.

An index of employment in service industries cooled to 55.3 in May from 56.7.

The business activity measure, which parallels the ISM’s factory production gauge, dropped to 59.5 from the prior month’s 61.6.

Manufacturing index

The group said Monday that its index of overall manufacturing expanded in May, with orders growing at the strongest pace in five months. The pickup in bookings and strongest reading for order backlogs since November point to production gains that will probably help the economy bounce back after shrinking in the first quarter.

The dollar’s advance since mid-2014 and the global drop in oil prices have reduced exports and business investment, exacting a bigger toll on manufacturing than service producers.

The appreciating greenback curtailed overseas shipments in the first quarter, causing the trade gap to subtract the most from the economy in 30 years.

GDP, the volume of all goods and services produced, shrank at a 0.7 percent annualized rate from January through March. It was the weakest reading since frigid winter temperatures derailed growth at the start of 2014.

Sustained improvement in hiring and household spending, which accounts for almost 70 percent of the economy, are needed to ensure growth rebounds as Federal Reserve officials project.

Fed’s Brainard

Fed Governor Lael Brainard said Tuesday a recent run of weak data casts doubt on the strength of the economy. In a speech to the Center for Strategic and International Studies in Washington, Brainard suggested she’s open to a delay in the Fed’s timetable for an interest-rate increase this year.

“There is value to watchful waiting while additional data help clarify the economy’s underlying momentum,” Brainard said. “If continued labor market strengthening is confirmed and inflation readings continue to improve, liftoff could come before the end of the year.”

Consumer spending unexpectedly stalled in April as the saving rate grew. An unchanged reading in purchases followed a 0.5 percent gain the prior month that was larger than previously estimated, Commerce Department figures showed Monday in Washington.

May auto sales figures indicate consumers aren’t retrenching totally. Most automakers beat estimates for May light-vehicle sales, with General Motors Co.’s results the best for the month since 2007 and Fiat Chrysler’s the highest in a decade. The annualized rate of U.S. sales jumped to 17.7 million, the strongest since July 2005, according to Ward’s Automotive Group.

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