Services Probably Shrank for Second Month: U.S. Economy Preview

Services Probably Shrank for Second Month: U.S. Economy Preview


Aug. 3 (Bloomberg) -- Service industries in the U.S. probably shrank in July for a second straight month, signaling the slowdown in growth broadened, economists said before a report this week.

The Institute for Supply Management's non-manufacturing index, covering almost 90 percent of the economy, rose to 48.8 from 48.2 in June, according to the median forecast of economists surveyed by Bloomberg News. A reading of 50 is the dividing line between contraction and expansion.

Other reports this week may show home sales declined and consumer spending slowed, indicating the real-estate recession and soaring fuel costs are rippling through the economy. Concern over the outlook for both growth and inflation will prompt Federal Reserve policy makers to keep interest rates unchanged at the conclusion of their meeting on Aug. 5.

``There are downside risks to the economy on the housing front, the manufacturing front and household spending,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York. ``The Fed has little choice but to stand pat.''

The Tempe, Arizona-based purchasing managers' group is scheduled to release its services report on Aug. 5. The institute said on Aug. 1 that its manufacturing index dipped to 50 last month from 50.2, signaling factory activity stalled.

Consumers are trimming spending as gasoline prices remain near $4 a gallon, home values fall, credit becomes more difficult to obtain and the job market weakens.

Job Losses

Employers cut 51,000 workers from payrolls in July, the seventh straight decline, and the unemployment rate rose to 5.7 percent, the Labor Department said on Aug. 1. The rate has jumped by 0.7 percentage point since April, the biggest three- month gain since the end of the last U.S. recession in 2001.

``My outlook is cautious -- the consumer clearly is pulling in and is not spending as much,'' Stephen Holmes, Chief Executive Officer at Wyndham Worldwide Corp., said in a July 31 interview. ``We are assuming this will be an issue and a challenge and a headwind for our industry throughout 2009.''

Parsippany, New Jersey-based Wyndham franchises Ramada and Super 8 hotels. U.S. revenue per available room, a measure of rates and occupancy, declined 3.7 percent in the quarter.

A report tomorrow is projected to show consumer spending slowed in June as the boost from tax rebates waned. Purchases increased 0.4 percent after a 0.8 percent rise in May, according to economists surveyed. Incomes probably dropped 0.2 percent as fewer rebate checks reached taxpayers bank accounts.

Less Spending

Economists anticipate spending will continue to weaken in coming months as the housing and labor markets remain depressed.

Pending home resales fell 1 percent in June, the fourth decline in six months, economists project a report from the National Association of Realtors will show on Aug. 7.

The figure is considered a signal of future home sales because it is calculated based on contract signings. The Realtors group said on July 24 that its existing home sales measure, which is recorded at the time a contract closes, fell in June to a 10-year low.

Investors anticipate the Fed will hold its benchmark interest rate at 2 percent in two days as it tries to steer the economy through the slowdown in growth and pickup in prices.

BLOOMBERG