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Thursday July 5 1:46 PM ET

Job Worries Cloud Rebound in Services

By Andrew Priest

NEW YORK (Reuters) - A gauge of U.S. service sector activity rebounded in June, suggesting major portions of the economy are growing after two straight months of contraction and fueling expectations the economic slowdown may have bottomed.

The National Association of Purchasing Management's report on Thursday follows recent data on housing, consumer confidence and orders for durable goods that have stirred expectations a recovery is at hand and the Federal Reserve (news - web sites)'s six-month interest rate-cutting campaign may soon end.

But optimism that the worst of the slowdown may be over was tempered by a surge in corporate layoff announcements last month and a government report showing the number of Americans remaining on unemployment rolls topped 3 million for the first time since November 1992.

``Although the signs have been a little bit more encouraging within recent reports, the weakest element remains the labor market,'' said John Ryding, senior economist at Bear, Stearns & Co. in New York.

Economists see a rise in job losses as a risk to economic recovery as higher unemployment tends to sap consumer confidence and rein in spending. Retail spending has kept economic growth afloat amid a slump in business spending.

NAPM said its monthly non-manufacturing index rose to 52.1 in June, its highest since 61.1 in December 2000 and up from 46.6 in May.

Even though economists said the four year-old NAPM index had yet to prove itself as a reliable economic indicator, it was the latest in a string of reports suggesting a brighter economic outlook.

The NAPM data helped the dollar surge to eight-month highs against the euro as investors bet the U.S. economy is on the mend. Treasuries, which tend to underperform as growth strengthens, tumbled before paring some of their losses.

``Obviously the reading above 52 is starting to get the bond bears thinking the economy has certainly started to expand again,'' said Gemma Wright, fixed-income strategist at Barclays Capital in New York.

A reading over 50 in the NAPM survey indicates an expansion in service activity. The survey is made up of sectors such as transportation, legal services, real estate and business services.

JOB LOSSES TEMPER TURNAROUND HOPES

The NAPM non-manufacturing new orders index, seen by economists as a good leading indicator of activity, rose to 53.1 in June from 48.6 in May. The measure of prices firms paid for goods and services fell to 55.5 in June from 59.5 in May, suggesting limited pricing power for firms while growth is weak.

``I think it's reflecting a bit of a turnaround,'' Ralph Kauffman, chair of the NAPM non-manufacturing business survey committee, said of the June report.

Despite the expansion in activity, the survey's employment index edged down to 45.1 in June from 46.6 in May, the fourth straight month the survey has indicated the service sector is shedding jobs.

In a separate survey, the government said the number of Americans signing up for initial jobless benefits rose last week while the number of people remaining on the unemployment rolls topped 3 million for the first time in 8-1/2 years.

Initial claims for state unemployment insurance benefits rose to 399,000 in the week ended June 30 from a revised 392,000 in the prior week, the Labor Department (news - web sites) said. The increase was in line with Wall Street expectations.

Economists noted that although jobless claims were higher in the most recent week, the four-week moving average of initial claims, viewed as a more accurate indicator of labor market conditions than the weekly figure, fell for the third consecutive week, to 407,500 in the week ended June 30 from 417,000 a week earlier.

On Friday, the department issues its report on June employment, a key factor in the Federal Reserve's calculations as it weighs its next move on interest rates.

The U.S. central bank has cut rates six times this year by a total of 2.75 percentage points and has indicated it is prepared to do more should the economy deteriorate further.

A shift to a quarter percentage point cut last week from the half percentage point cuts seen earlier was taken as a signal by economists that rate cuts could soon end.

Layoffs announced by U.S. firms jumped 56 percent in June compared with May, according to outplacement firm Challenger, Gray & Christmas.

In the first half of 2001, U.S. corporations said they planned to cut 777,362 jobs, more than three times the number announced during the first six months of last year.

``There's a general perception that rehiring is not occurring at this point. Layoffs are still occurring as firms battle for profitability,'' said Alan Ruskin, research director at 4Cast Ltd. in New York.

Separately, an index compiled by the Federal Reserve Bank of Chicago based on May data showed the recession risk for the economy increased to its highest point this year.

The Chicago Fed said its monthly National Activity Index recovered slightly, to -1.06 in May from a revised -1.23 in April. But the three-month moving average came in at -1.04 from -0.96 in April, which the Chicago Fed said suggests a greater risk of recession, which is loosely defined as at least two consecutive quarters of economic contraction.

U.S. Treasury Secretary Paul O'Neill, speaking before heading to Rome for a one-day meeting on Saturday with finance ministers from the Group of Seven industrial nations, said U.S. growth should pick up later this year, in part due to tax cuts.

-- (M@rket.trends), July 05, 2001