By Bob Willis Nov. 4 (Bloomberg) -- Service industries in the U.S. grew in October at a slower pace than anticipated, a sign growing joblessness may restrain consumer spending. The Institute for Supply Management’s index of non- manufacturing businesses fell to 50.6 from 50.9 in September, according to the Tempe, Arizona-based group. Another report showed companies continued to cut staff. Mounting unemployment may mean consumer spending will only accelerate with government assistance, indicating the emerging recovery may lose momentum as stimulus fades. The lack of jobs makes it more likely Federal Reserve policy makers today will reiterate plans to keep their key interest rate near zero for an “extended period” to prevent a relapse. “The setback in services sector activity is troubling for the economic recovery,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. “The economy cannot be said to be in recovery mode unless consumers are spending more on services.” Stocks held earlier gains after the report. The Standard & Poor’s 500 Index was up 1.2 percent to 1,058.07 at 10:15 a.m. in New York. Treasury securities fell, pushing the yield on the 10-year note up to 3.49 percent from 3.47 percent late yesterday. Lower Than Forecast The index was projected to increase to 51.5, according to the median forecast of 77 economists surveyed by Bloomberg News. Estimates ranged from 49.2 to 54.4. Fifty is the dividing line between expansion and contraction. The gain in October marks the first back-to-back expansion in non-manufacturing industries, which make up almost 90 percent of the economy, since the two months ended May 2008. A report from ADP Employer Services today showed companies cut an estimated 203,000 jobs in October, the smallest reduction in more than a year. The ISM non-manufacturing gauge of new orders increased to 55.6, the highest level in two years, from 54.2 the prior month. The index of employment dropped to 41.1, the lowest level since May, from 44.3. A measure of prices paid climbed to 53 from 48.8. Categories in the ISM services survey include utilities and resources, health care, housing, transportation and finance and insurance. U.K. Expands A similar report from Markit and the Chartered Institute of Purchasing and Supply in London today showed a U.K. index of service industries rose in October to the highest level since the credit squeeze began in August 2007. The need to prevent inventories from falling even more as sales improve is giving U.S. manufacturing a boost. The ISM purchasing managers’ group said two days ago its factory gauge rose in October to the highest level in more than three years. The economy grew at a 3.5 percent rate in the third quarter following four quarters of contraction that marked the deepest recession since the 1930s. Economists surveyed by Bloomberg early last month forecast growth will cool to a 2.4 percent rate in the current quarter and for all of 2010. The jobless rate probably rose to 9.9 percent in October, a 26-year high, and payrolls have may fallen by 175,000 workers, according to the survey median before the Labor Department’s monthly jobs report on Nov. 6. Fed Outlook Fed officials, at the end of their two-day policy meeting today, may acknowledge the economic outlook has brightened since their last gathering, and will probably maintain a pledge to leave the benchmark interest rate near zero, analysts said. Federal tax credits of up to $8,000 for first-time homebuyers and “cash-for-clunkers” rebates of up to $4,500 to trade in gas-guzzlers for new fuel-efficient cars have helped spur consumer demand for houses and cars. Auto sales rebounded in October after slumping the previous month when the auto incentive expired in late August. Cash for clunkers “stimulated new vehicle sales and was a psychological signal to consumers that it was safe to begin to buy again,” Michael Jackson, chief executive officer at AutoNation Inc., the biggest U.S. auto retailer, said on a conference call last week. Cars and light trucks sold at a 10.5 million annual pace in October, exceeding the median forecast of analysts surveyed and up from a 9.2 million pace the previous month, industry figures yesterday showed. Homebuilding, which is included in ISM’s services index, contributed to economic growth in the third quarter for the first time since 2005. The number of contracts to buy previously owned homes rose in September for an eighth month, signaling sales may keep rising in coming months, data from the National Association of Realtors showed this week. Congress is debating extending the homebuyer credit after it expires at the end of November to prevent demand from retrenching. To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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