ISM: Service Sector Growth Slows

Business activity in the services sectors of the economy grew at an unexpectedly slow pace in May but the outlook for continued growth remains positive, the Institute for Supply Management (search) reported Friday.

The Tempe, Ariz.-based research group reported that its index of non-manufacturing business activity fell to 58.5 in May from 61.7 in April. Analysts had been looking for a reading of 60.0.

Any reading above 50 indicates expansion in the services sector, while a reading below 50 means contraction.

The ISM reported that 11 service industries reported growth in May, one reported slower activity and five were unchanged. The survey measures the vitality of various service industries such as insurance, real estate and communications.

There was little reaction to the downtick in service sector activity on the bond market, which is highly sensitive to economic indicators. Bonds were already trading higher Friday, pushing their yields lower, because of an earlier report showing a much weaker than expected reading in the employment market.

The yield on the 10-year note fell to 3.83 percent from 3.90 percent late Thursday, while stocks, which were also down already on the employment report, continued to slide after the release of the ISM data. The Dow was off 46.19 at 10,507.30 in morning trading.

The Labor Department (search) had reported that employers added only 78,000 jobs last month, far below the 274,000 added in April and also below the 175,000 that analysts had been expecting. That report is seen as an important element in the Federal Reserve's (search) decisions on short-term interest rates.

The increase in service sector activity in May marked the 26th consecutive month of expansion. Ralph Kauffman, who runs the ISM's survey committee for the service sector, said in a statement that the faster rates of increases in new orders and backlogged orders in May indicated that service sector business activity "should continue at relatively healthy levels in the near-term future."