Service Sector Growth Hurt by High Oil Prices in Sept.

The U.S. services sector (search) grew at its slowest pace for two and a half years in September, hampered by high oil prices and concern over the aftermath of Hurricane Katrina, the Institute for Supply Management's (search) survey showed Wednesday.

The ISM's services index dropped to 53.3 in September from 65.0 in August and well below Wall Street's median forecast for a fall to 61.0.

A number above 50 indicates growth in the sector.

The services sector constitutes about 80 percent of the U.S. economy, and includes diverse areas such as hair salons, restaurants, hotels and airlines.

The survey's prices paid index rose to 81.4 in September from 67.1 as fuel prices remained stubbornly high, making this its highest reading in the eight years that the ISM has conducted its non-manufacturing survey.

Ralph Kauffman, chairman of the ISM Non-Manufacturing Business Survey Committee, said the report mostly reflected the effects of Katrina and said the slowdown would probably be short-lived.

"Unless there are other problems, like serious transportation problems or severe effects from the high price of energy, I would expect a bounce-back pretty quickly in most of the industries," he said.

Paresh Upadhyaya, a portfolio manager at Putnam Investments in Boston, said the report reflected the concerns expressed by Federal Reserve (search) members on mounting inflationary pressures in the economy.

"This number lines up with the Fed view that inflationary pressures remain in the economy and that they will maintain a tightening bias," he said.

The survey's jobs component fell to 54.9 from 59.6, while new orders dropped to 56.6 from 65.8.