By Courtney Schlisserman Jan. 6 (Bloomberg) -- Service industries in the U.S. expanded less than forecast in December, indicating the recovery in manufacturing has been slow to lift the biggest part of economy. The Institute for Supply Management’s index of non- manufacturing businesses that make up almost 90 percent of the economy rose to 50.1 from 48.7 in November, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction in the industry. The figures highlight concerns of Federal Reserve policy makers that unemployment near a 26-year high and tight credit threaten to restrain growth. Central bankers have reiterated their intention to keep interest rates near zero “for an extended period” to aid the expansion. “This recovery has yet to broaden out,” Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said before the report. “The construction sector seems to be running out of steam. Low credit ability and employment are headwinds for the service sector.” The December figure compared with economists’ median forecast for an increase to 50.5, according to 67 projections in a Bloomberg News survey. Forecasts ranged from 48 to 52.1. The services index is up almost 13 points from a record low of 37.4 reached in November 2008, a period of mounting job losses, falling home and stock prices, and a lack of credit for businesses. The ISM began keeping records in 1997. The non-manufacturing gauge of business activity, a measure of sentiment, rose to 53.7 in December from 49.6 a month earlier. The index of new orders dropped to 52.1 last month from 55.1 and a gauge of backlogs eased to 48 from 48.5. Employment Index The employment index rose to 44 last month from 41.6 in November. Figures earlier today showed an improving labor market. Planned payroll reductions dropped 73 percent in December from a year earlier, according to the job placement firm Challenger, Gray & Christmas Inc. A separate report today from ADP Employer Services showed companies cut an estimated 84,000 jobs in December, the fewest since March 2008. The Labor Department may report on Jan. 8 that employment was unchanged in December after almost two years of job cuts, according to a Bloomberg survey. The ISM’s measure of new export orders dropped to 46 from 54.5, while the index of prices paid increased to 58.7 from 57.8. Manufacturing Gauge Categories in the ISM services survey include retail, utilities and resources, health care, housing, transportation and finance and insurance. The measure has lagged the group’s manufacturing gauge, which rose in December to the highest level since April 2006 as factories ramped up production to rebuild inventories and meet increasing global demand. The economy grew at a 2.2 percent annual pace in the third quarter following four quarters of contraction that marked the deepest recession since the 1930s. Economists at JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley in New York are among those projecting the economy expanded by at least a 4 percent annual rate in the final three months of 2009. The pace will probably cool early this year. “Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual,” Federal Reserve Vice Chairman Donald Kohn said Jan. 3 in a speech to the American Economic Association in Atlanta. Federal Reserve Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent to support an economy that is recovering from the worst recession since the Great Depression. Central bankers said Dec. 16 that high unemployment and “subdued” inflation warrant low interest rates “for an extended period.” Toys “R” Us Inc. is among retailers extending discounts beyond Christmas to lure customers. “We are going to be very aggressive, we’ve been aggressive all season,” Toys “R” Us Chief Executive Officer Jerry Storch said by telephone Dec. 23 from Wayne, New Jersey, where the largest U.S. toy chain is based. At the same time, homebuilders are still struggling. While sales improved last year, builders are reluctant to start new projects with more foreclosures keeping prices in check. “We believe it may take some time for Americans to regain confidence in our economy, their job status and the benefits of home ownership,” Robert Toll, chief executive officer at luxury homebuilder Toll Brothers Inc., said in a Dec. 3 statement. “We anticipate a gradual recovery in housing, similar to the one that occurred in the early 1990s.” To contact the reporter on this story: Courtney Schlisserman at cschlisserma@bloomberg.net

Source