August 3, 2011 / 12:26 PM / 6 years ago

Service sector growth slowest since 2010

<p>Customers drink coffee at a Miamai restaurant in a file photo.Eric Thayer</p>

NEW YORK (Reuters) - The pace of growth in the services sector ticked down unexpectedly in July to the lowest level since February 2010 and the number of jobs created by the private sector also slowed, reports showed on Wednesday.

Taken alongside disappointing data on the manufacturing sector earlier in the week, the services data showed an economy that was frustrating hopes for a rebound in the second half of the year after a very weak first half.

"It looks like this confirms that we are in a bit of a soft patch here," said Rudy Narvas, senior economist at Societe Generale in New York.

"It is not pointing to recession, but we still have to see how the data turns out -- the data is a little bit all over the place these days and the risk is things are not looking as bright as they were in June or prior to that."

While the weakness in the first months of the year had been attributed to temporary factors such as a jump in oil prices and the impact from Japan's massive earthquake in March, signals of a pickup have so far been elusive.

Economists say the economy could face a further drag from the budget deficit cutting plan approved by Congress this week, although cuts in spending will be phased in gradually.

The Institute for Supply Management said its services sector index fell to 52.7 last month from 53.3 in June. The reading fell shy of economists' forecasts for 53.6, according to a Reuters survey, though it was still above the 50 figure that indicates expansion in the sector.

The new orders gauge slipped to 51.7 from 53.6, while employment fell to 52.5 from 54.1.

The data rattled markets and U.S. stocks tumbled with the broad S&P 500 index falling to a new low for the year. Meanwhile, investors pushed into bonds with longer maturities, with analysts citing speculation that the Federal Reserve might have to implement more accommodative measures to help the economy. The 30-year Treasury bond rallied two points.

The ISM report echoed earlier global data that showed the euro zone's service sector grew at its weakest pace in nearly two years, while China's sector grew at its slowest in three months.

"Like the manufacturing report earlier this week, the non-manufacturing ISM shows an economy stuck in first gear," said Chris Low, economist at FTN Financial.

ISM's manufacturing report on Monday showed the sector also grew at its slowest rate in two years last month. Government data on Wednesday showed new orders received by U.S. factories fell in June, pulled down by weak demand for transportation equipment.

The Commerce Department said orders for manufactured goods fell 0.8 percent after a revised 0.6 percent increase in May. Economists had forecast a 0.7 percent decline after a previously reported 0.8 percent rise.

Earlier on Wednesday the ADP National Employment Report showed employers added 114,000 jobs in July, coming in modestly above expectations, but still fewer than the month before. Economists had anticipated a gain of 100,000 jobs.

June's private payrolls were revised down to an increase of 145,000 from the previously reported 157,000.

Analysts now have their attention focused on the U.S. government's key jobs report on Friday, which is forecast to show the pace of job creation accelerated last month. The economy is expected to have gained 85,000 jobs, not enough to push the unemployment rate below its current 9.2 percent.

Also on the labor market front, planned layoffs at U.S. firms jumped to a 16-month high in July as sectors which had been seeing fairly few layoffs unexpectedly bled jobs.

Employers announced 66,414 planned job cuts last month, up 60.3 percent from 41,432 in June, according to a report from consultants Challenger, Gray & Christmas, Inc.

Layoffs in the pharmaceutical and retail sectors overtook nonprofit and government job cuts last month.

Job cuts at Merck & Co., Borders, Cisco Systems, Lockheed Martin and Boston Scientific accounted for 57 percent of the July total, according to Challenger, making July the first month in seven in which the government sector did not shed the most jobs.

A round of data on the housing market gave a mixed picture of the sector. Home prices rose in June for a third straight month but were still down compared to a year earlier in a continued hangover from the expiration of last year's tax credit, according to data analysis company CoreLogic.

But a separate report showed applications for U.S. home mortgages rose last week as interest rates fell.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 7.1 percent in the week ended July 29.

Additional reporting by Alexandra Alper and Chris Reese, Editing by Chizu Nomiyama

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