WASHINGTON – A survey of U.S. service firms says the sector expanded at a slower pace in April than March, as companies reported less business activity and couldn’t raise their prices.
The Institute for Supply Management said Friday that its index of non-manufacturing activity fell to 53.1 in April from 54.4 in March. Any reading above 50 indicates expansion.
The report measures growth in industries that cover 90 per cent of the work force, including retail, construction, health care and financial services.
The decline in the overall index suggests some service companies may be starting to see less consumer demand, in part because of higher Social Security taxes.
April’s weakness was largely because of a steep drop in a measure of prices. That index dropped from 55.9 in March to 51.2 last month. Nearly 70 per cent of firms surveyed said they did not change their prices last month, while 10 per cent lowered them.
A measure of business activity also declined. Still, a gauge of new orders was mostly unchanged and businesses stepped up restocking, typically a sign that they expect consumer spending to pick up.
Growth in the service industry depends largely on consumers, whose spending drives roughly 70 per cent of economic activity. Americans boosted their spending from January through March at the fastest pace in more than two years, despite the increase in Social Security taxes that kicked in on Jan. 1.
But other indicators suggest the tax increase is starting to catch up with consumers. Retail spending fell in March by the most in nine months.
The survey’s index of hiring also fell, indicating fewer jobs were added last month. But the survey conflicted with a separate government report Friday that said service-sector hiring improved in April.
The Labor Department said service firms added 185,000 jobs last month, up from 139,000 in March. That helped lower the unemployment rate to a four-year low of 7.5 per cent.
The tax increase has lowered incomes for a typical household earning $50,000 by about $1,000 this year. A household with two highly paid workers has up to $4,500 less.
Most economists predict the tax increase and steep government spending cuts that began on March 1 could slow economic growth in the April-June quarter.
Consumers are more optimistic that the job market is healing and will deliver higher pay later this year, according to a survey of April consumer confidence released Tuesday.
And other trends may offset some of the impact of the taxes this year. Consumers have cut their debts. Rising home values and stock prices have increased household wealth And average gas prices nationwide have dropped 27 cents from their peak this year to $3.52 a gallon, according to AAA.