Sept. 3 (Bloomberg) -- Service industries that make up most of the U.S. economy shrank at a slower pace last month, further evidence that the worst recession since the 1930s is ending. The Institute for Supply Management’s index of non- manufacturing businesses rose to 48.4, the highest level in 11 months, from 46.4 in July, according to the Tempe, Arizona- based group. Readings below 50 signal contraction in industries that account for 90 percent of the world’s largest economy. Federal Reserve efforts to unlock credit and government measures including tax incentives for first-time home buyers are reviving demand and may help the economy grow this quarter. A separate report today showing unemployment claims were higher than forecast reinforces the Fed’s predictions that the recovery will be restrained by weakness in the labor market. “Recovery is coming -- it’s probably here in the sense we’ve passed the trough of the recession,” said Nigel Gault, chief U.S. economist at IHS Global Insight Inc. in Lexington, Massachusetts. “It’ll take some time to broaden out, and it won’t be until next year that we start to see increases in employment.” The Standard & Poor’s 500 stock index rose 0.3 percent to 997.69 at 11:48 a.m. in New York. The yield on the benchmark 10-year Treasury note was at 3.34 percent, up from 3.31 percent late yesterday. Jobless Claims First-time applications for jobless benefits fell by 4,000 to 570,000 in the week ended Aug. 29, exceeding the 564,000 median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed. The total number of people collecting unemployment insurance climbed. Analysts surveyed by Bloomberg forecast a Labor Department report tomorrow will show August payrolls fell by 230,000, the smallest decrease in a year. The unemployment rate probably rose to 9.5 percent in August after dipping the month before. The economy has lost 6.7 million jobs since the recession started in December 2007, the most of any downturn since the Great Depression. Even so, the 247,000 drop in payrolls reported for July was lower than economists projected. Fed officials, at their August meeting, expressed doubts about the pace of a likely economic recovery, in part because rising unemployment will weaken consumer spending. “Most participants saw the economy as likely to recover only slowly during the second half of this year,” according to minutes of the Aug. 11-12 Federal Open Market Committee meeting released yesterday. “Labor market conditions remained of particular concern.” Employment Gauge The ISM’s gauge of non-manufacturing employment rose to 43.5 from 41.5 the prior month, and the index of new orders rose to 49.9 from 48.1. Both measures were the highest since last September. The survey covers industries including utilities, health care, housing, transportation, and finance and insurance. An ISM report two days ago showed manufacturing expanded in August for the first time in 19 months, helping lead the economy out of the downturn. The group’s factory index rose to 52.9, posting its biggest two-month gain since 1983. Consumers streamed into auto showrooms last month to take advantage of the Obama administration’s cash-for-clunkers program. Ford Motor Co.,Toyota Motor Corp. and Honda Motor Co. led U.S. auto sales to the first year-over-year gain in August since 2007. Insurers may benefit from the trade-in program, which could yield as much as $375 million in premiums as drivers pay more to protect new cars, said Robert Hartwig, president of the New York-based Insurance Information Institute. Tax Credit Housing is getting support from tax credits for first-time buyers, low interest rates and drops in prices resulting from a glut of foreclosed properties. Combined sales of new and existing homes in July climbed to the highest annual rate since November 2007, the month before the recession began. Some retailers also are seeing a shift. Tiffany & Co., the world’s second-largest luxury-jewelry seller, said second-quarter profit fell less than analysts estimated on higher-than-expected sales and lower expenses. The New York-based company raised its annual profit forecast. Dollar Tree Inc., the U.S. retailer of items priced $1 or less, reported second-quarter profit that exceeded analysts’ estimates and boosted its full-year forecast as more shoppers sought cheaper household basics. “Our traffic is up substantially,” Dollar Tree Chief Executive Officer Bob Sasser told analysts on a conference call last week. “We’re seeing new customers.” To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Bob Willis in Washington bwillis@bloomberg.net

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