The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell more than forecast to 54.1, the lowest level since March, from 55.8 the prior month, the Tempe, Arizona-based ISM said. Readings above 50 signal growth.
Declining home construction and defaults on subprime mortgages are taking a toll on retailers, wholesalers and financial firms. The Federal Reserve will cut interest rates again at a policy meeting next week to avert a broader decline, trading in federal funds futures suggests.
``This reflects slowing demand for services,'' said David Sloan, senior economist at 4Cast Inc. in New York, who had forecast a decline in the main index. The drop in the new orders index ``suggests there's a more significant slowing in activity and employment coming down the pipeline, even though it's holding up now.''
The index was projected to slip to 55, the median forecast in a Bloomberg News survey of 71 economists. Estimates ranged from 51.5 to 56.4. The index has averaged 57.7 since its inception in July 1997.
Payroll Report
Earlier today, a private report based on payroll data showed companies in the U.S. added 189,000 jobs in November, more than economists had forecast. The increase followed a revised estimate of 119,000 new jobs in October, more than previously calculated, ADP Employer Services said today.
Worker productivity in the U.S. accelerated in the third quarter, causing labor costs to drop, the Labor Department reported. Productivity rose at an annual rate of 6.3 percent, the most since 2003, while labor costs declined at a 2 percent pace. Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation.
The institute's index of new orders for non-manufacturing industries fell to 51.1, the lowest since April 2003, from 55.7 the prior month.
An index of employment dropped to 50.8 from 51.8, and a gauge of inventories rose to 50.5 from 49.5. An index of backlogs increased to 48.5 from 43.5 the prior month, today's figures showed.
Costs Jump
A measure of prices paid jumped to 76.5, the highest since September 2005, from 63.5.
The economy also is getting less help from manufacturing, which grew in November at the slowest pace in 10 months, according to a Dec. 3 report from the supply-management group.
Economists and the Fed have scaled back growth forecasts as banks shrink lending and the housing slump lingers. San Francisco Fed President Janet Yellen this week said financial conditions and consumer spending have deteriorated more than she expected in the past month, signaling she supports cutting interest rates next week.
The economy faces a risk ``that the problems in the housing market could spill over to personal consumption expenditures in a bigger way than has thus far been evident,'' Yellen said in a speech in Seattle on Dec. 3.
Consumer Spending
Consumers, whose spending accounts for more than two-thirds of the economy, are becoming more frugal in the face of falling home values, rising gasoline bills, and dimmer prospects for jobs and earnings growth. Commerce Department figures showed that consumer spending and incomes rose less than economists forecast in October.
Sears Holdings Corp., the biggest U.S. department-store chain, said last week it doesn't expect ``any significant near- term improvement'' in the retail business, while American Woodmark Corp., the supplier of kitchen and bath cabinets to home centers and builders, cut its 2008 profit and sales forecast.
``The continuing impact of tighter credit conditions and falling real-estate prices will cause the remodeling and new- construction markets to remain subdued,'' American Woodmark said in a statement last week.
Rising fuel costs and weak freight demand also led FedEx Corp., the second-largest U.S. package shipping company, to cut its fiscal 2008 profit forecast in November for a second time.
Not all service providers are hurting. Burger King Holdings Inc., the second-largest U.S. hamburger chain, said in November that first-quarter profit rose more than analysts estimated, helped by extended hours and new menu items.
