U.S. ISM Services Index Reached 14-Month High in June

Growth in U.S. service industries unexpectedly accelerated to the fastest pace in 14 months in June, reinforcing evidence the economy picked up last quarter.

The Institute for Supply Management's index of non- manufacturing businesses, including banks, builders and retailers, rose to 60.7 in June from 59.7 in May, the Tempe, Arizona-based group said today. Readings above 50 point to growth.

Expansion in service businesses, which make up almost 90 percent of the economy, is cushioning the fallout from the housing slump. A manufacturing recovery will give further stimulus to growth, which economists predict will approach a 3 percent pace in the second half of the year.

``Service industries remain healthy and continue to pump out the majority of the nation's jobs,'' Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. ``Demand for services is continuing to expand. This is supportive of growth.''

The index was projected to slip to 58, the median forecast in a Bloomberg News survey of 73 economists. Estimates ranged from 54.9 to 62.3. The index has averaged 57.7 since its inception in July 1997.

Growth in service industries is being complemented by gains in manufacturing. A report from the ISM on July 2 showed manufacturing grew in June at the fastest pace in 14 months.

Job Gains

Employers also continue to add workers, helping sustain growth in consumer spending. A private report today showed job gains accelerated in June and a government report tomorrow is forecast to say the unemployment rate held close to a six-year low last month.

ADP Employer Services said today that companies added 150,000 jobs in June after a revised 98,000 gain in May. The Bloomberg survey median was for an increase of 100,000 in June.

The ISM's index of employment for non-manufacturing industries rose to 55, the highest since May 2006, from 54.9.

The gauge of new orders fell to 56.9 from 57.4 the prior month. A measure of prices paid fell to 65.5 from 66.4.

A gauge of inventories fell to 52.5, from 61. The group's index of backlogs for non-manufacturing industries fell to 46.5 from 48 the prior month, today's figures showed.

Fed Outlook

Federal Reserve policy makers, who kept the benchmark interest rate unchanged at 5.25 percent last week, reiterated their prediction of ``moderate'' growth in coming quarters.

Economists forecast the economy will pick up pace after growing at a 0.7 percent rate in the first quarter, the slowest in four years. Consumer spending, boosted by rising employment and incomes, grew at a 4.2 percent annual rate in the first quarter, according to figures from the Commerce Department.

Service companies benefiting from consumer demand include McDonald's Corp., which said on June 8 that its monthly sales increased the most in three years in May, helped by new versions of snacks in the U.S.

Travel and tourism businesses are also seeing signs of strength.

``We remain optimistic about the economy,'' Jonathan Tisch, co-chairman of Loews Corp., the owner of Loews Hotels, said in an interview June 28. ``Business continues to be strong. Across the country, people are still traveling.''

Housing remains an area of weakness. Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, said June 27 its first-quarter sales were hurt as customers bought less bedding and curtains. The company also said profit for the year ending in February 2008 may stagnate or fall if housing stays sluggish.

7/5/2007 7:53:23 AM