Services sector growth streak alive

Pace off but index shows expansion for 25th mont
EIU/ Infoestrategica

NEW YORK -- The service portion of the economy expanded in April for the 25th straight month but at a slower pace than in March, a private research organization said Wednesday.

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The Institute for Supply Management said its index of activity among service companies fell to 61.7 from 63.1 in March. Economists had expected a decline to 61. Although the gauge slid, it remained above 50, indicating the sector continued to grow.

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The institute said that 14 of the industries it tracks reported growth last month, while two--transportation and legal services--remained the same. Only entertainment reported decreased activity from March.

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The report came a day after the Federal Reserve, worried about rising inflation, pushed its benchmark interest rate to 3 percent from 2.75 percent.

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Higher interest rates are a defense against rising inflation. But when it is more expensive to borrow money, some consumers and businesses are less inclined to spend and invest, factors that would further chill an already cooling economy.

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"It's not a good time for the services sector," Paul Finkelstein, chief executive of Regis Corp., the world's largest operator of hair salons, told Bloomberg News. "You're not only competing within your industry, but with other industries because there's only so much discretionary income."

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Oil prices soared into record territory in March and hit a new peak of $57.27 a barrel at the beginning of April, straining household and business budgets. Prices have since retreated and closed at below $50 a barrel Tuesday.

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"I would say that the recent slow economic growth is an indication of higher energy prices and that the second most likely culprit is interest rates," said Patrick Fearon, senior economist at A.G. Edwards & Sons Inc. in St. Louis.

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Mark Vitner, senior economist at Wachovia Corp. in Charlotte, N.C., said higher energy costs do not hurt the services industry as much as the manufacturing sector.

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"The survey is consistent with an economy that is moderating but still growing," Vitner said.

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Employment in the non-manufacturing sector also increased at a slower rate than in March, with the index hitting 53.3 percent in April, down from 57.1 percent. It was the 19th consecutive month of growth, but the biggest decrease since July.

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A measure of new orders dropped to 58.8, the lowest level since June 2003, from 62.1. The index of order backlogs fell to 54 from 56.5. The inventory index rose to 54.5 from 52.5.

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A gauge of prices paid, a measure of costs for purchased materials and services, slid to 61.9 from 65.6.

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The services index has averaged 57.5 since 1997, its first year. The gauge reached an all-time high of 66.9 in April 2004. Services account for about 85 percent of the economy.

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SOURCE: EIU/ INFO-e

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