Services sector seen expanding modestly in May

By Richard Leong - Poll

NEW YORK (Reuters) - The vast U.S. service sector likely expanded modestly in May, even as consumers have rolled back spending amid surging energy prices and a deteriorating job market.

The median forecast for the Institute for Supply Management's index on non-manufacturing activity came in at 51.0 in May, suggesting service industries grew at a modest pace last month, according to economists polled by Reuters. That median forecast compared with a reading of 52.0 in April.

Of the 76 analysts surveyed, the forecasts ranged from a low of 48.5 and a high of 53.0.

A reading above 50 means the service sector is growing.

A plus-50 reading in May would show that the service sector likely expanded for a second straight month, whereas the smaller manufacturing industries contracted for a fourth straight month in May.

The ISM non-manufacturing index hit a recent low of 44.6 in January.

Meanwhile, the survey's business activity component gauge was forecast to come in at 50.7 in May compared with 50.9 in April.

ISM's service industries report is due at 1O a.m. EDT on Wednesday.

The following is a selection of comments from economists:

HSBC

Forecast: 50.0

"ISM non-manufacturing has bounced back quickly from the low reading of 44.6 in January, rising to 52 in April. This reading was partly boosted by a spike in the supplier deliveries index to 56 from 49, while the new orders series has remained around 50 for the past two months."

LEHMAN BROTHERS

Forecast: 51.0

"Since its sharp drop in January, the (non-manufacturing index) NMI has been on a steady upward trend. We believe this reflects a correction from January's excessive decline rather than a sign of improving conditions in the economy."

MERRILL LYNCH

Forecast: 49.0

"We expect this decline to stem from several factors. Chief among them is the continued deterioration in the housing market. The latest read on home builder sentiment from the National Association of Home Builders, for example, was the lowest level on record. Meanwhile, employment is expected to remain weak; the latest claims data are consistent with negative payrolls and rising unemployment. In addition, earlier this week, the Richmond Fed gave us a snapshot of the service sector in the Mid-Atlantic region. And their service sector index was weak across the board, posting declines in every category from revenues to product demand expectations to employment and wage growth in both the retail and non-retail subcomponents."

(Polling by Bangalore Polling Unit)

(Reporting by Richard Leong; editing by Gary Crosse)