April 5, 2011 / 5:08 PM / 8 years ago

U.S. services growth retreats from 5-yr high - ISM

NEW YORK (Reuters) - Growth in the U.S. economy’s vast services sector slowed last month, an industry report showed on Tuesday, held back in part by supply disruptions caused by Japan’s earthquake.

After hitting a five-year high in February, the Institute for Supply Management’s index of non-manufacturing activity slipped back in March and prices eased.

Nonetheless, the services sector posted a 16th straight month of growth.

The survey could strengthen the case of some top Federal Reserve officials who argue the U.S. economy is not yet strong enough to warrant removing the massive support provided by the U.S. central bank.

On Monday, Federal Reserve Chairman Ben Bernanke said a spike in U.S. inflation was being driven by commodity prices and would probably not last.

The ISM’s manufacturing report last week showed rising commodity costs pushed prices to their highest since mid-2008.

Tuesday’s report on the services sector, which accounts for about 80 percent of the U.S. economy, was below median forecast of the 71 economists surveyed by Reuters.

“It suggests that we are still in expansion mode, but things are slowing down a little bit,” said Rudy Narvas, senior economist at Societe Generale. “The data on balance has been sort of mixed. A lot of people are downgrading their first quarter growth estimates, and we are as well.”

Strategists at RBS said some firms indicated that disruptions in the supply chain stemming from Japan’s earthquake complicated production, “so that may explain some of the slide” in business activity.

Toyota Motor Corp said this week disruptions in parts supplies will force it to shut some of its North American plants in April, which could lead to a shortage of new models in auto showrooms this spring.

Rising oil prices and Japan’s crisis did dent confidence among small U.S. business leaders, according to a separate survey published by Vistage.

The report showed 50 percent of CEOs in the first quarter expected improvement in the economy. That figure stood at 59 percent the prior quarter.

Hiring plans were unchanged, according to the report. “It has stalled because there’s a new level of uncertainty. That is not surprising, given events in Japan and the Middle East,” said Vistage International Chief Executive Rafael Pastor.

Inflation also appears to be a bigger concern in Europe. Service-oriented businesses in the euro zone and Britain saw solid growth in March, suggesting expansion in both economies could surpass economists’ forecasts. Firms, however, reported that inflation was squeezing profit margins.

The European Central Bank, by contrast, is expected to raise interest rates by a quarter-point to 1.25 percent on Thursday.

Inflation is already a problem in China, where the central bank raised deposit and lending rates by a quarter point on Tuesday, the fourth hike since October.

Editing by Padraic Cassidy and Andrew Hay

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