Unemployment claims on rise, service industry index slides

Analysts see stalling growth

Commuters exit a New York train station yesterday. Unemployment benefits applications rose last week. (MARK LENNIHAN/ASSOCIATED PRESS)

WASHINGTON - Service industries in the United States contracted for a third month in March and claims for unemployment benefits unexpectedly jumped last week, reinforcing speculation the economy is shrinking.

The Institute for Supply Management's nonmanufacturing index was 49.6 in March, higher than economists had forecast, up from 49.3 in February. A reading of 50 is the dividing line between growth and contraction. The Department of Labor said the number of Americans filing first-time unemployment benefit claims rose to 407,000 last week, the most since September 2005.

"All of this is reflective of an economy that has essentially stalled," said David Resler, chief economist at Nomura Securities International Inc. in New York, who forecast an ISM reading of 49. "A lot more companies are in a hiring freeze. The service sector is basically dead in the water."

Treasuries climbed after the reports as investors bet that the Federal Reserve will keep lowering interest rates to restore growth later in the year. Fed chairman Ben S. Bernanke on Wednesday acknowledged for the first time that a recession is possible this year as homebuilding declines and spending slows.

Economists forecast the ISM index would fall to 48.5, according to the median of 69 projections in a Bloomberg News survey. The measure reached a record low of 44.6 in January.

The last time the ISM services index was less than 50 for at least three consecutive months was in 2001-2002 as the economy was emerging from a recession.

Initial jobless claims climbed by 38,000 in the week that ended March 29, the Labor Department said. The number of people remaining on benefit rolls jumped by 97,000 to 2.937 million, the highest level since July 2004, in the week ended March 22.

Last week's initial claims may have been pushed higher as some state unemployment offices processed a backlog from the previous week, which included the Good Friday holiday, a Labor Department spokesman said.

The ISM report showed an employment gauge was unchanged at 46.9 for a second month in March. The index for nonmanufacturing business activity rose to 52.2 from 50.8 the prior month. Measures of new orders and prices also increased.

Manufacturing in the United States contracted less than forecast in March, as gains in exports helped offset declines in orders, the purchasers' group said. Its factory index increased to 48.6 from 48.3 in February.

"The economy is weak, but not gaining momentum to the downside," Alan Levenson, chief economist at T. Rowe Price Group Inc. in Baltimore, said. The weakness "is mostly closely related to the housing sector."

The US economy has slowed to a "virtual standstill," hurting global growth prospects, and financial market strains are the biggest threat to the outlook, the International Monetary Fund's chief economist Simon Johnson said in a statement Wednesday.

Johnson said market conditions, higher energy prices, "softer" labor markets, and a weak housing market "conspire to weigh heavily on the economy in the near term."

A report from the Labor Department today is projected to show the United States lost jobs for a third straight month in March and the unemployment rate rose to 5 percent from 4.8 percent, according to economists surveyed by Bloomberg News.

A cooling job market, tight credit conditions, and the deepening slump in housing have shaken consumer confidence and hurt spending. Retail sales fell 0.6 percent in February, according to figures from the Commerce Department.

The slowdown continued in March. The International Council of Shopping Centers and UBS Securities LLC on April 1 lowered March chain-store sales estimates for a second time in two weeks as purchases of clothing waned.

Sales at stores open at least a year will probably fall or be little changed for the month, the group said, after rising just 0.5 percent last week from a year earlier. The increase was the smallest since April 2003.