Service sector shrinks less than expected in June

NEW YORK -- The U.S. services economy -- from retailers and restaurants to real estate brokers -- contracted less than expected in June in its best showing since before the financial crisis struck last fall, according to a private trade group's gauge.

But with rising unemployment and constrained credit driving consumers to spend less and save more, one analyst says a sustained economic recovery likely is years, not months, away.

"It's going to take a long time before the economy is really back up to its potential," said Capital Economics analyst Paul Ashworth.

While the U.S. should see growth in the next few months, he said it could be 2011 or 2012 before the economy reaches a rate of activity that helps boost wages, he said.

The Institute for Supply Management on Monday said that its services index rose to 47 in June from 44 in May. Economists polled by Thomson Reuters had expected a June reading of 45.5.

Any reading below 50 indicates the services sector is shrinking, and June marked the ninth straight month of contraction. Still, it was the best showing since September when the index was at 50.

Service industries such as retailing, financial services, transportation and health care make up about 70 percent of the country's economic activity. Any turnaround in the sector requires improved consumer spending.

The country's restaurants, shops, professional and other service providers have been hurt as consumers save more and spend less amid the longest recession since World War II.

Business activity, new orders and employment contracted at a sharply slower pace in June than in May, according to the ISM survey. All three hit their highest levels since September, and business activity, at 49.8, is nearly in growth territory.

"The ISM employment indices suggest payrolls should be falling at about 200,000 a month now," Ashworth said. Employers cut 467,000 jobs in June, and companies slashed an average of nearly 700,000 jobs a month during the first quarter of this year.

Newspaper publisher Gannett Co., hit with an accelerating slump in ad revenue, said last week it plans to cut 1,400 jobs in the next few weeks, about 3 percent of the work force. Social-networking site MySpace, owned by News Corp., last month announced 720 job cuts in the U.S. and overseas. Even Harvard University said it was slashing 275 staff jobs as its endowment shrank.

The ISM services index closely reflects the country's retail sales, said High Frequency Economics analyst Ian Shepherdson. National chains this week are expected to report weak sales for June, and Shepherdson doesn't expect much improvement over the summer.

The government said Americans' savings rate was the highest in more than 15 years in May, while the Conference Board said consumer confidence fell in June as unemployment grew to a 26-year high of 9.5 percent.

And the prices businesses paid grew for the first time since October, according to the ISM index. Many commodities, including oil, have seen prices rise recently. The cost of future oil supplies last week hit their highest level in eight months.

The ISM is a Tempe, Arizona-based trade group of purchasing executives in 18 industries. Its index is based on a survey of members and covers new orders, employment, inventories and other indicators.

Real estate, finance and insurance, and food and hotel companies were among the six industries that reported growth last month.

The 11 sectors that posted declines included agriculture, retail, health care, educational services, and corporate support and management. Utilities were flat.