Instant View: Service sector growth slows in April

NEW YORK (Reuters) - The pace of growth in the U.S. services sector unexpectedly eased in April, according to an industry report released on Wednesday.

KEY POINTS:

* The Institute for Supply Management said its services index fell to 52.8 last month from 57.3 in March. * That was well below economists' forecasts for 57.4, according to a Reuters survey. * A reading above 50 indicates expansion in the sector.

COMMENTS:

PAUL ASHWORTH, CHIEF U.S. ECONOMIST, CAPITAL ECONOMICS, TORONTO:

"The slump in the U.S. ISM non-manufacturing index...probably mainly reflects the negative impact of rapidly rising food and energy prices on the retail sector. At that level, the index is consistent with GDP growth of only 1.5 percent, not that much different from the actual 1.8 percent growth we saw in the first quarter.

"In contrast, the manufacturing index remained above the 60 mark for the fourth consecutive month in April and points to GDP growth of 5 percent. Unfortunately, services dominate the U.S. economy, with the factory sector accounting for barely more than 10 percent.

"Looking at the detail of the non-manufacturing survey, the new orders and business activity indices both fell very sharply, with the employment index recording a much more modest drop. The non-manufacturing index can be a little volatile from month to month - for instance it slumped from 52 in December 2007 to 45 in January 2008, before rebounding to 50 in February.

"Nevertheless, at the very least this will dampen hopes of a rapid re-acceleration in GDP growth in the second quarter."

JOSEPH VERANTH, CHIEF INVESTMENT OFFICER, DANA INVESTMENT ADVISORS, BROOKFIELD, WISCONSIN, WHICH MANAGES $2.8 BILLION

"It was weak and a little bit of a disappointment for the market. Japan may have been a factor, even though that took place in March. We've got a fairly large two-month dip. Based on the GDP number in the first-quarter, this reflects a little bit of a speed bump in the recovery. Japan is part of the problem.

"The recent weakness (in data) is worth watching. If we get additional numbers that corroborate this, it could mean that the recovery trajectory may be taking a lower path than we've been expecting. The market is reflecting some of that idea."

CHRIS RUPKEY, CHIEF FINANCIAL ECONOMIST, BANK OF TOKYO/MITSUBISHI UFJ

"ISM fell sharply for the larger, services part of the economy, and this has brought the economic data back to the front burner of market concerns. Economic weakness always brings in buyers and bonds have moved to new highs as it looks like the higher gasoline prices are indeed causing a soft patch for the economy. The market thinks that will delay any Fed tightening to late in 2012."

RUDY NARVAS, SENIOR ECONOMIST, SOCIETE GENERALE, NEW YORK

"It was weaker than expected but seasonal factors were pretty strong, suggesting that it would weigh on the index. New orders was down, which is disappointing and employment was down as well but on the other hand you saw a down tick in prices paid."

TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK

"We're surprised at the weakness in service activity, we did not expect it would pullback this month, we are at the lowest in multiple months. It's very surprising, new orders fell sharply, employment, all the underlying numbers you would want to hold up, didn't. It's a disappointing report."

"I think it's a little too early to say this is the beginning of a meaningful softening in activity, but this also means that the employment report on Friday gets even greater emphasis. You're going to need something to refute the utter weakness from this report."

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK

"It's a weak indication not only in the headline figure, but also in the worst possible place: the orders component. That component factors into the calculation on the headline number. The orders index fell nearly 12 points which is obviously a big hit. It hasn't been this low in many months. This is a sector that is supposed to be relatively smooth in terms of growth so if it turns out to be more than transitory, this would be a clear indication of de-stabilization in the economy."

MARKET REACTION:

STOCKS: U.S. stocks add to losses.

BONDS: U.S. bond prices extend gains.

FOREX: The dollar extends losses versus yen, hits session lows versus euro