Trade group says US service sector grew in May

The U.S. economy's service sector, which employs 90 percent of the nation's work force, grew in May for an 18th straight month, posting slightly faster growth than in April.

The Institute for Supply Management said Friday that its index tracking the health of service companies increased to 54.6 in May from 52.8 in April.

In February, the index hit a five-year high with a reading of 59.7, but it fell in March and April as the service sector was battered by the sharp jump in energy prices. Any reading over 50 indicates expansion in the sector.

Analysts said while the rise in May was welcome, it still showed the economy facing significant headwinds. The Labor Department reported Friday that the unemployment rate rose to 9.1 percent in May as payroll growth slowed to 54,000 jobs, the slowest in eight months.

"The economy has hit a pothole," said Jennifer Lee, senior economist at BMO Capital Markets.

Paul Ashworth, chief U.S. economist at Capital Economics, said that even with the slight upturn in May, the index is still running significantly below the 57 to 59 range where it had been from December through March.

"The pace of growth in the non-manufacturing sector has lost a lot of momentum over the past couple of months," Ashworth said.

The institute, a private trade group representing purchasing managers, said that companies responding to its May survey cited continued concerns about high fuel costs and rising prices for other commodities.

The index measures activity for a range of industries including retail, health care, financial services and construction. The index plummeted to 37.6 in November 2008, at the height of the financial crisis, and had readings indicating services were contracting for all but three months in 2009.

For May, the portion of the index measuring business activity edged down slightly while the component that measures new orders posted a solid gain and the component tracking employment also rose. The component tracking prices posted a slight decline in May.

The spike in energy and food prices this year has left consumers with less money to spend elsewhere which means less spending for businesses providing services such as retail stores and restaurants.

A separate ISM index that tracks activity in the manufacturing sector expanded in May but at the slowest pace in 20 months, further evidence that the economy has entered a soft patch.