Survey: Expansion by U.S. services companies slowed in July

By Josh Boak
AP Economics Writer

WASHINGTON (AP) — A private survey has found that U.S. services companies expanded more gradually in July, with job gains slowing in a key gauge of economic growth.

The Institute for Supply Management said Wednesday that its non-manufacturing index fell to 55.5 in July from 56.5 in June, although any reading above 50 signals growth. New orders increased over the past month, while the index’s employment and production measures remained positive but downshifted.

The U.S. economy has been running close to stall speed for the first half of the year. Businesses appear to be pulling back on investments despite signs of healthy demand from consumers and a reasonably solid jobs market. The services index indicates that the seven-year recovery from the U.S. recession appears resilient despite signals that the pace of that recovery is slipping.

“The recent strength of underlying retail sales can largely explain the resilience of service sector activity,” said Andrew Hunter, U.S. economist at Capital Economics.

The economy expanded at an annual pace of just 1.2 percent in the April-June quarter after a sluggish 0.8 percent and 0.9 percent rate in the prior two quarters. Economic growth is now at roughly half the pace it achieved over the past three years, according to the Commerce Department.

The biggest factor in the weakness last quarter was that businesses reduced their restocking to levels not seen since 2011. That pullback in inventory rebuilding subtracted 1.2 percentage points from annualized growth in the April-June quarter. But consumer spending grew at a 4.2 percent annual rate last quarter, suggesting that those businesses will have to increase their restocking again to meet customer demand.

The July employment report that the government will issue Friday will show whether job gains can support much of that consumer spending. Economists have estimated that 175,000 jobs were added last month and that the unemployment rate dipped to 4.8 percent from 4.9 percent.

Services have been a source of strength for the economy during the recovery from the Great Recession. The ISM services index has shown growth for 78 straight months. Of the 18 industries tracked by the services, 15 reported growth in July.

The ISM is a trade group of purchasing managers whose services survey covers businesses that employ the vast majority of workers, including retail, construction, health care and financial services companies.

Employees of private services companies hold 71 percent of American jobs (excluding farm workers), and services firms account for 94 percent of the 12.9 million jobs created since the recession ended in June 2009.