By Bob Willis Dec. 3 (Bloomberg) -- Service industries in the U.S. unexpectedly contracted in November as companies lost confidence the recovery will gather strength. The Institute for Supply Management’s index of non- manufacturing businesses that make up almost 90 percent of the economy fell to 48.7 from 50.6 in October, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction. The group’s measure of business confidence dropped to the lowest level in four months. Job losses are making it difficult for consumer spending to gain traction, pointing to a tenuous economic recovery entering 2010. The lack of spending, which accounts for about 70 percent of growth, and unemployment above 10 percent are reasons why Federal Reserve policy makers have repeated pledges to keep their key interest rate near zero for an “extended period.” “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 trimmed gains after the report. The Standard & Poor’s 500 Index added 0.2 percent to 1,111.62 at 10 a.m. in New York, paring an advance of as much as 0.7 percent. None of the economists surveyed by Bloomberg News forecast a contraction in the index. The figure compared with economists’ median forecast for a gain to 51.5, according to 71 projections in a Bloomberg survey. Estimates ranged from 50.1 to 53. Services contracted for 11 months through August. Business Sentiment The ISM non-manufacturing gauge business activity, a gauge of sentiment, declined to 49.6 in November from 55.2 a month earlier. A gauge of new orders fell to 55.1 from 55.6 the prior month. A measure of backlogs declined to 48.5 last month from 53.5. The index of employment rose to 41.6 from 41.1. A measure of new export orders rose to 54.5 from 53.5, while the index of prices paid increased to 57.8 from 53. Other reports today showed first-time jobless claims unexpectedly dropped last week to the lowest level in more than a year and third-quarter productivity rose at the fastest pace in six years. The number of Americans filing first-time claims for unemployment benefits declined by 5,000 to 457,000 in the week ended Nov. 28, the fewest since September 2008, the Labor Department said in Washington. Productivity Rises The productivity of U.S. workers increased at an 8.1 percent annual rate, while labor costs fell at a 2.5 percent pace. Categories in the ISM services survey include retail, utilities and resources, health care, housing, transportation and finance and insurance. Factories have enjoyed export growth and a pickup in U.S. demand at the same time companies have pared inventories. The growth in manufacturing has helped services. ISM said two days ago its manufacturing gauge showed expansion for a fourth consecutive month, led by gains in new orders and exports. The economy grew at a 2.8 percent annual pace 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 accelerate to 3 percent in the current quarter before cooling to an average 2.6 percent rate for all of 2010. Government Stimulus President Barack Obama’s Nov. 6 extension of a first-time homebuyers’ tax credit through April may extend gains in home purchases that have helped stabilize housing this year. That’s lifted demand in non-manufacturing industries, including construction companies, mortgage brokers and retailers. U.S. retail sales on Black Friday and the weekend after Thanksgiving advanced 0.5 percent as discounts on electronics and toys drew budget-conscious crowds, according to the National Retail Federation. Best Buy Co., the biggest electronics chain, had bigger early-morning crowds than last year, said Brian Dunn, chief executive officer and president of the Eden Prairie, Minnesota- based company. “Our traffic across the country measured by the lines in front of our stores is longer this year than last year, and the traffic to our Web site is greater this year than it was last year,” Dunn said in a Bloomberg Television interview on Nov. 27. “The traffic reports we have from around the country are better than they were even two years ago.” Holiday Sales Toys “R” Us, based in Wayne, New Jersey, sold a “significant number” of Apple Inc. iPods and tens of thousands of Zhu Zhu Pets robot hamsters, said Chairman and CEO Jerry Storch in a Nov. 27 interview. Auto dealers are also seeing some strength, even after the end of federal “cash-for-clunkers” incentives in late August. U.S. auto sales ran at a faster pace in November, signaling that buyers are returning to showrooms. General Motors Co., Toyota Motor Corp., Ford Motor Co. and Chrysler Group LLC all posted results that beat analysts’ estimates. The seasonally adjusted sales rate was 10.9 million vehicles, up from 10.4 million a year earlier, industry researcher Autodata Corp. said. To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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