ISM: Services Sector Slows in May, Job Prospects Improve

NEW YORK – Growth in the giant U.S. services sector slowed in May but remained strong enough to create new jobs, a survey showed Thursday.

The Institute for Supply Management's (search) non-manufacturing index eased to 65.2 in May from a record of 68.4 set in April and just short of Wall Street estimates for a dip to 66.0.

"It still shows the economy is growing but at a little slower pace," said Robert Macintosh, chief economist at Eaton Vance Management (search) in Boston.

A number abt of the U.S. economy.

More companies said in the survey they intended to take on new workers, boding well for Friday's key May employment report from the U.S. government.

Many economists believe that given the migration of many manufacturing jobs abroad, the long-awaited revival of the nation's labor market will have to take place in services.

The ISM's employment index climbed to 56.3 in May from 54.5 in April, although new orders fell to 61.3 from 65.6 in April, suggesting overall growth could slow further.

Inflationary pressures were clearly building, with the prices paid index jumping to 74.4 from 68.6.

"It does provide some warning that this is not just a case of goods inflation starting to take hold but it's also apparent in the service sector as well," said Alan Ruskin, research director at 4Cast Ltd.

Financial markets had little reaction to the services data, with most investors too concerned about Friday's payrolls number to care about anything else.

Analysts are worried that with inflation picking up and the job market looking better, the Federal Reserve (search) will have to raise interest rates faster than originally anticipated.

Some fear that interest rate adjustments that are too abrupt could crimp the recovery, particularly by slowing the red-hot housing sector that has been a central pillar of growth in recent years.