U.S. Service Industry Grows At Slowest Pace In 17 Months


WASHINGTON -- Restaurants, hotels, retailers and financial companies saw more business in July, but the broader U.S. service industry experienced its weakest growth in 17 months.

The report Wednesday from the Institute for Supply Management confirms other data that show the economy is struggling two years after the recession officially ended.

The trade group of purchasing executives said its index for services companies fell to 52.7, from 53.3 in June. Any reading above 50 indicates expansion.

The ISM's index covers 90 percent of the work force. It reached a five-year high of 59.7 in February, but has fallen since then. The July reading was the lowest since February 2010.

Separately, the Commerce Department said businesses cut orders for airplanes, autos and heavy machinery in June. Factory orders dropped 0.8 percent, the second drop in three months.

Stocks fell after the reports were released. The Dow Jones industrial average dropped 78 points in morning trading, and broader indexes also declined.

New orders to service companies, an indication of future business, increased but at the slowest pace since August 2009, according to the ISM report. Services firms are still hiring more workers, the report said. But employment growth dipped in July.

The report "suggests that the economy is not slipping into a recession but instead that growth is very weak," said Paul Dales, an economist at Capital Economics.

Economic growth slowed to less than 1 percent in the first six months of this year, the government said Friday. Consumer spending, which fuels 70 percent of economic activity, fell in June for the first time since September 2009.

As the economy has slowed, so has hiring. Employers added only 18,000 jobs in June, the fewest in nine months. The unemployment rate rose to 9.2 percent, the highest level this year.

The government will release the July jobs report Friday. Economists predict only 90,000 jobs were added last month and the unemployment rate was unchanged. The economy needs roughly three times that many jobs to reduce the unemployment rate.

Much of the slowdown stems from a spike in gas prices since last year. That reduces the amount of money consumers can spend on discretionary goods, such as furniture, electronics, and appliances. Spending on those categories has fallen for three straight months.

The Commerce report on factory orders showed that demand for such durable goods fell 1.9 percent in June. That's slightly less than a preliminary estimate issued last month. Durable goods are products that are expected to last at least three years.

Businesses are still investing in equipment and other goods. A key category that measures their investment rose 0.4 percent. But business demand for transportation equipment fell 8.6 percent. That reflected a 28.9 percent drop in orders for commercial aircraft and a 2.7 percent decline in orders for autos and auto parts.

The manufacturing sector has been a leading driver of growth since the recession ended but has faltered since this spring. Factories recorded their weakest growth in two years in July, according to the separate ISM manufacturing index that was released Monday.

Most economists have reduced their economic growth forecasts based on the recent string of weak data. Dales now expects growth of only 2 percent in the second half of the year, down from an earlier forecast of 2.5 percent.

The ISM, a trade group of purchasing executives based in Tempe, Ariz., compiles its service sector index by surveying about 375 purchasing executives across the country.

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AP Economics Writer Martin Crutsinger contributed to this report.

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