U.S. service sector grows unexpectedly

updated 11:00 a.m. ET Sept. 4, 2008

NEW YORK - The U.S. services sector grew unexpectedly in August for the first time in three months as new orders improved and inflation moderated, a private trade group said Thursday.

The Institute for Supply Management, a trade group of purchasing executives, said the services sector index rose to 50.6 in August from 49.2 in July. It beat economists' prediction of a reading of 50.0, according to the consensus estimate of Wall Street economists surveyed by Thomson Financial/IFR.

A reading below 50 signals contraction, while a reading above 50 indicates growth.

An improvement over July in production, new orders and deliveries boosted the index.

"The index is likely enjoying a final boost from the pickup in retail sales generated by the tax rebates; typically the index lags movements in sales by a month or two," said Ian Shepherdson, chief economist at High Frequency Economics.

On Thursday, many U.S. retailers reported sluggish sales for the back-to-school season, as shoppers remained cautious because of higher prices for food and fuel and a weak job market.

Although inflation remained elevated, with a reading of 72.9 out of 100, it fell sharply from July, when the reading was 80.8. Prices have been increasing for the last 5 years, according to the survey. Food, plastic pipe, roofing materials, airfares and wine were among the commodities reported as up in price. Prices are dropping for computers, copper pipe and natural gas, according to the survey.

Real estate and rentals, mining, health care, education and utilities are all growing, according to the survey, while transportation, finance, hotels and wholesale trade are contracting.

New export orders showed decline for the second month as orders fell off in the finance, wholesale and retail industries. The weak dollar has bolstered exports, which has helped bolster the overall economy, but as European growth slows and the dollar strengthens, many economists fear export demand may weaken.

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