Ahead of the Bell:
ISM services

[October 05, 2011]  WASHINGTON (AP) -- Americans are eating out less, cutting back on travel and spending carefully in the weaker economy. As a result, U.S. service companies, which employ 90 percent of the workforce, likely grew at a slower pace last month.

Economists forecast the Institute for Supply Management's service sector index dropped to 53, down from 53.3 in August, according to a survey by FactSet.

Any reading above 50 indicates expansion for the sector, which covers a range of businesses from restaurants, hotels to financial services firms and retailers.

The report will be released at 10 a.m. Eastern on Wednesday. The ISM is a private trade group of purchasing managers.

The index reached a five-year high of 59.7 in February. It has weakened consistently since. In July, it fell to its lowest point level in 17 months.

Federal Reserve Chairman Ben Bernanke said Tuesday that the economic recovery "is close to faltering." Bernanke says that the economy is growing more slowly than the Federal Reserve had expected and that the biggest factor depressing consumer confidence is poor job growth.

Employers added no net jobs in August, the weakest month of hiring in nearly a year. The unemployment rate has been at or above 9 percent for all but two months since the recession officially ended in June 2009.

The government releases the September jobs report on Friday. Economists expect the economy added only 56,000 jobs last month. That's not enough to lower the unemployment rate, which is expected to stay at 9.1 percent for a third straight month.

The overall economy is expanding, but at such a slow pace that some economists fear it could fall back into recession. Several analysts have put the risk of a recession as high as 40 percent.

Those concerns overshadow some positive developments.

Manufacturing expanded at a faster pace in September than August, according to the ISM's manufacturing survey, released Monday. Production, export orders and employment all rose. But new U.S. orders shrank for the third straight month, which is a bad sign for future production.

Auto sales jumped 10 percent last month compared to a year ago, boosted by unexpected consumer enthusiasm for pickup trucks and SUVs.

Such modestly positive news caused Goldman Sachs to raise its forecast for growth in the July-September quarter to an annual rate of 2.5 percent, from 2 percent. But the firm is still pessimistic about the rest of this year and the start of next year. It forecasts just 1 percent growth for the October-December quarter and 0.5 percent for the first three months of 2012.

Andrew Tilton, an economist at Goldman, said the forecast mostly reflects the firm's expectation that Europe's debt crisis will push that region into recession later this year.

That, in turn, would cause European banks to cut back on lending to preserve cash. That would reduce credit to U.S. banks, slowing the economy. U.S. exports to Europe would also suffer.

[Associated Press]

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