Growth Accelerates in Service Sector

A gauge of the U.S. services industry, the largest part of the economy, posted its largest gain in a year in May, adding to evidence that growth may be poised to accelerate.

The Institute for Supply Management said Wednesday that its index for retailing, financial services and other non-manufacturing companies rose more than expected to 54.5 from 50.7 in April, the second month of expansion. The 3.8-point jump was the biggest since May 2002. Readings above 50 indicate expansion.

The Labor Department said in a separate report that worker productivity grew almost three times as fast in the first quarter as in the prior three months, helping to underpin profits and wages.

Productivity, a measure of how much an employee produces for every hour of work, rose at a 1.9% annual rate from January through March, the Labor Department said. That compares with last month’s estimate of 1.6% and a 0.7% pace of increase in the fourth quarter of 2002.

The institute’s service-sector index rose more than the forecast 52 last month, based on a survey of 55 economists. A decline in crude oil prices and the end of fighting in Iraq helped service firms, which account for 85% of the economy.

Transportation, utilities, construction, finance and banking, and mining showed the highest rates of growth in May, the institute said.

After showing contraction for half of 2001 as the economy fell into recession, the services gauge has signaled expansion in 15 of the last 17 months. The services index is based on a survey of more than 370 non-manufacturing companies.

The group’s index of prices paid, a measure of costs for purchased materials and services, dropped to 49.6 in May from 56.7. The inventory index gained to 52.5 last month from 51. The index of export orders fell to 49 from 52.5, while import orders surged to 58.5 from 50.

Employment in services continued to decrease in May, albeit less than in April.