Service sector grew at slightly faster pace in August

By Jeffry Bartash

Sept. 6, 2011 12 AM PT

Reporting from Washington —

The U.S. service sector expanded at a slightly faster pace in August, but growth was spotty and prices paid for raw materials shot up, according to a survey of senior executives.

The Institute for Supply Management said Tuesday that its service index rose to 53.3% in August from 52.7% in July. Economists surveyed by MarketWatch expected the index to fall to 51.0%.

Although readings over 50% indicate that more firms are expanding than contracting, the index is still well below its recent peak of 59.7% in February.

“Respondents’ comments remain mixed. There is a degree of uncertainty concerning business conditions for the balance of the year,” said Anthony Nieves, who directs the ISM service survey.

The U.S. service sector employs about four of every five workers and accounts for three-fourths of all economic activity. Although the increase in activity in August was small, the ISM report is one of the few indicators in recent weeks to show some improvement in the U.S. economy.

The new-orders portion of the ISM service index rose 1.1 percentage points to 52.8%, bouncing off a two-year low. And the backlog of orders index climbed 3.5 percentage points to 47.5%, the first increase in five months.

Yet the prices index jumped 7.6 percentage points to 64.2%, reflecting the high costs that companies continue to pay for raw materials or service integral to their own businesses.

Also, the employment index dropped to 51.6% from 52.5%, suggesting that fewer companies have plans to hire.

“Labor cost savings realized through attrition, as fewer replacements are hired,” one executive said in the ISM survey.

Only 10 of the 18 service sectors tracked by ISM reported growth. That’s down from 13 in July and 15 in June.

Mining, information services and retail posted the biggest growth. Education, entertainment and recreation, and business services contracted the most.

“Business climate uncertainty is increasing,” said one executive in the business-service sector.

Bartash writes for MarketWatch.com/McClatchy.