Service sector shrinks again

The U.S. service sector contracted for a third straight month in March and the number of workers applying for jobless benefits soared last week to a 2 1/2 -year high, reinforcing fears the economy has stalled.

The decline in services reported by the Institute for Supply Management was not as steep as analysts had feared.

Government data, however, showed that claims for unemployment benefits jumped to 407,000, the highest since September 2005, and raised the prospects that today’s non-farm payroll report could show deep job cuts as the economy struggles.

“It will add to fears that we are in a recession -- it was one piece of data that still didn’t suggest that as long as we were below the 400,000 handle,” said Kim Rupert, managing director for global fixed income analysis at Action Economics in San Francisco.

“It will weigh on concerns that we will get a low payrolls number.”

Economists polled by Reuters had expected initial jobless claims to increase to 370,000, compared with the upwardly revised 369,000 the week before.

Analysts fear that a housing slump and credit crunch may have tipped the U.S. economy into recession and are scrutinizing the labor market for evidence of slackening employment that could chill consumer spending.

“There are some of us out there that think the proverbial next shoe to drop is in employment,” said William O’Donnell, head of U.S. rate strategy and research with UBS in Stamford, Conn.

Economists expect today’s report to show that the economy shed a total of 60,000 jobs in March and the unemployment rate rose to 5.0% from 4.8% the previous month.

The Institute for Supply Management’s nonmanufacturing index came in at 49.6, slightly up from 49.3 in February but below the 50 mark, which separates growth from contraction.

The result was above the record-low 44.6 hit in January.

The March number was higher than the median forecast for 48.5 that economists predicted in a Reuters poll.

The services index has now been below 50 for three consecutive months, the first time it has been mired in such a slump since January 2002, when the economy was still feeling the lingering effects of the last recession.

Adding a note of gloom, most chief executives expect a drop in U.S. employment levels over the next four to five months, according to the monthly survey by Chief Executive magazine.