BUSINESS
04/05/2011 11:58 am ET | Updated Jun 05, 2011

Service Sector Continues To Grow, But At A Slower Pace, ISM Says

NEW YORK (Steven C. Johnson) - Growth in the vast U.S. services sector slowed last month and price pressures eased slightly, according to an industry report released on Tuesday, but overall activity expanded for a 16th straight month.

The Institute for Supply Management said its index of non-manufacturing activity fell to 57.3 in March, retreating from February's reading of 59.7, a five-year high.

The March result was below the 59.5 median forecast of the 71 economists surveyed by Reuters. A reading above 50 indicates expansion in the sector.

"It suggests that we are still in expansion mode, but things are slowing down a little bit," said Rudy Narvas, senior economist at Societe Generale. "The data on balance has been sort of mixed. A lot of people are downgrading their first quarter growth estimates, and we are as well."

The ISM's manufacturing report on Friday showed slightly slower growth last month as well, though rising commodity costs pushed prices to their highest level since mid-2008.

The service report's prices component slowed to 72.1 from 73.3 in March but notched its 20th consecutive month of gains. The employment component slowed to 53.7 from 55.6.

THE INFLATION QUESTION

Some Federal Reserve policymakers have mused recently about the need to tighten monetary policy to prevent inflation, but markets don't expect a near-term rate hike.

The European Central Bank, by contrast, is expected to raise interest rates by a quarter-point to 1.25 percent on Thursday.

Service-oriented businesses in the euro zone and Britain saw solid growth in March, suggesting expansion in both economies could surpass economists' forecasts. Firms there, however, reported that inflation was squeezing profit margins.

Inflation is already a problem in China, where the central bank raised deposit and lending rates by a quarter point on Tuesday, the fourth hike since October.

Rising oil prices, along with Japan's crisis, have dented confidence among small U.S. business leaders, according to a separate survey published by Vistage.

The report showed 50 percent of CEOs in the first quarter expected improvement in the economy, from 59 percent the prior quarter.

Hiring plans were unchanged, according to the report. "It has stalled because there's a new level of uncertainty. That is not surprising, given events in Japan and the Middle East," said Vistage International Chief Executive Rafael Pastor.

(Editing by Padraic Cassidy)

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