July 6, 2010 / 3:17 PM / in 7 years

Service sector grows more slowly, employment weak

NEW YORK (Reuters) - The U.S. service sector expanded in June for a sixth straight month but growth was at the slowest pace since February, the latest evidence that the economic recovery is cooling.

<p>A sign in the window of a restaurant that is hiring is seen in San Francisco, June 3, 2010. REUTERS/Robert Galbraith</p>

Analysts said the data released on Tuesday by the Institute for Supply Management, an industry group, did not signal that the United States is slipping back into recession -- something which has been a persistent fear in the wake of a raft of disappointing data.

The data on business activity in the service sector, which dominates the U.S. economy, follows weak reports in recent weeks on U.S. consumer spending, factory activity, employment and the housing market.

The Institute for Supply Management said its service sector index fell to 53.8 from 55.4 in May. A reading above 50 indicates expansion in the sector, while a reading below 50 indicates contraction. The median forecast was for a reading of 55, according to a survey of 72 economists polled by Reuters.

“It’s consistent with the general tone of data, suggesting that the pace of growth is a little more moderate,” said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey.

“It’s certainly not suggestive of the double-dip scenario that some people are pushing,” he added.

New orders also fell, to 54.4 from 57.1, suggesting growth may be moderating, while export orders turned negative.

U.S. stocks rebounded on Tuesday with all three major indexes closing moderately higher, but gains came as investors took advantage of recent price declines. Prices of safe-haven Treasuries rose as bond investors continued to bet the Federal Reserve will keep interest rates low into the second half of 2011 to avoid a double-dip recession.

EMPLOYMENT SLUGGISH

The ISM report’s data on employment gave a more pessimistic picture of the economy. The employment component declined to a reading of 49.7 from 50.4, contracting once again after having turned positive last month and confirming weak reports on the labor market.

On Friday, the U.S. Labor Department reported private payrolls rose only modestly in June and overall employment fell for the first time this year as thousands of temporary government census jobs ended.

“Right now the labor market -- and rightfully so -- is everybody’s focus,” said Peter Jankovskis, co-chief investment officer at Oakbrook Investments LLC in Lisle, Illinois.

The health of the labor market is considered key to the U.S. economic recovery because jobs are critical to powering consumer spending, which drives about two-thirds of the country’s economy.

Separate data on Tuesday gave a somewhat more positive reading on the labor market. The Conference Board, a private research group, reported its gauge of the U.S. job market improved in June for the 11th straight month, but at a moderate pace amid weak private-sector job creation.

The Conference Board said its Employment Trends Index rose to 96.7, up from a revised 96.1 in May.

The index is up about 9.8 percent from a year ago, the group said.

“The weak growth in private sector employment in the last two months has been disappointing, given the robust recovery in production in recent quarters,” said Gad Levanon, associate director for macroeconomic research at The Conference Board.

“The moderate increase in the Employment Trends Index in the last two months suggests that many employers are now concerned that the recovery is losing momentum.”

Reporting by Edward Krudy; Writing by Leslie Adler; Editing by Dan Grebler

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