Washington, April 3 (Bloomberg) -- U.S. service industries contracted in March by the most since October 2001, the month after the terror attacks, and jobless claims last week were the highest in almost a year, government and industry reports said. The Institute for Supply Management's index for retail, financial services, construction and other non-manufacturing businesses fell to 47.9 last month from 53.9 in February. None of the economists in a Bloomberg News survey expected a reading below 50, the level that indicates a contraction. The U.S. war against Iraq that began March 19 contributed to the first decline in demand for services in 14 months as consumer confidence hit a decade low and companies cut jobs. The Labor Department today said initial claims for jobless benefits rose by 38,000 to 445,000 last week, a sign that tomorrow's monthly jobs may be weaker than some economists forecast.
``The run-up to war brought the economy to a near standstill,'' said Jade Zelnik, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. That's ``unlikely to be a surprise'' to Federal Reserve policy makers, whom she expects to withhold a decision for now on an interest rate cut. David Rosenberg, the chief North American economist at Merrill Lynch & Co., said today's claims report is consistent with his prediction that March's unemployment rate will be higher and job losses greater than most peers estimate. The Labor Department is forecast to say the economy shed 35,000 jobs last month and the jobless rate rose by a tenth of a point to 5.9 percent, based the median forecasts of 67 economists surveyed by Bloomberg News. ``The labor market continues to weaken,'' said Rosenberg, who predicts a loss of 85,000 jobs and a 6 percent rate.
ISM Services
The Tempe, Arizona, supply-management institute's service index was forecast to show slower growth by slipping to 52, based on the median forecast of 50 economists. A reading of 50 is the dividing point between contraction and expansion. The index is based on a survey of more than 370 retailers, wholesalers, transportation and other non-manufacturing firms. ``A substantial amount of the drop can probably be attributed to uncertainty -- people not doing anything,'' said Ralph Kauffman, chairman of the institute's non-manufacturing business survey committee. ``The potential for growth is there after the war, and we'll just have to see whether it comes to pass.'' The institute's new orders index fell to 47.7 last month from 53 in February. Order backlogs dropped to 47.5 from 50. The employment index decreased to 47.9 from 49. The index of prices paid, a measure of costs for purchased materials and services, jumped to 62 in March from 60.9. The inventory index rose to 49.5 last month from 48.5, while export orders contracted and import orders expanded.
Jobless Claims
Services account for 85 percent of the U.S. economy. The institute's manufacturing index for March, issued Tuesday, signaled declining activity for the first time since October. Both surveys of purchasing managers began before the war started March 19. Manufacturing accounts for a seventh of the economy. Economists had projected that U.S. initial jobless claims would total 410,000 after the 402,000 originally reported for the prior week, based on the median of 38 forecasts in a Bloomberg News survey. Claims last week were the highest since 452,000 in the week ended April 13, 2002. ``Initial claims were weak, which raises the concern that tomorrow's payroll number will be worse than what most people are looking for,'' said Michael McGlone, a government bond analyst at ABN Amro Inc. one of 22 firms that trade with the Federal Reserve. February's loss of 308,000 jobs was ``shockingly weak.''
Jobs and Growth
Jobs are essential for a pickup in growth because employment provides the income for consumer spending, which accounts for two- thirds of the U.S. economy. The four-week moving average of claims, which smoothes out volatility in the weekly numbers, rose to 426,250 from 423,750. Claims have averaged 406,150 so far this year. That compares with 405,000 last year, when the U.S. grew 2.4 percent. The number of workers continuing to receive jobless benefits increased to 3.608 million in the week that ended March 22 from 3.501 million the prior week. It was the highest since the week that ended Nov. 16, when the total was 3.61 million. Disruptions leading up to the war have already reduced economic expectations. In a Bloomberg quarterly survey of 67 economists last month, the median estimate of first-quarter growth dropped to a 2 percent pace from 2.5 percent in a December sounding. The estimate has since fallen further and now stands at 1.8 percent, based on a survey of 32 economists.
War's Impact
The war in Iraq will hold back U.S. economic growth this year to 2.5 percent to 3 percent as consumers and businesses rein in spending, the Conference Board said in a report today. The nonprofit New York research group's forecast was down from 3.5 percent before the threat of war emerged last year, and it was consistent with the reduced expectations in the latest Bloomberg quarterly survey. Treasuries rose after today's economic reports showed the war in Iraq is helping slow the U.S. economy. The benchmark 3 7/8 note due in 2013 rose about 1/8 point, pushing its yield down 2 basis points to 3.91 percent. Stocks erased early gains on the economic reports. The Standard & Poor's 500 Index fell 4.45 points, or 0.51 percent, to close at 876.45, and the Dow Jones Industrial Average lost 44.68 points, or 0.54 percent, to close at 8240.38.
U.S. Treasury Secretary John Snow plans to tell Germany and France next week that they should share the cost of rebuilding Iraq after a war they oppose. Next Friday's meeting of finance ministers and central bankers from the Group of Seven industrialized nations will involve ``helping make sure that we all pay for the costs'' of reconstructing Iraq following the U.S.-led war, Snow told business leaders in Florida. Service industries in Europe shrank last month as well, a similar survey showed. An index based on responses from 2,000 purchasing managers in the region that uses the euro dropped to 47.7, the lowest in 17 months, from 48.9 in February. //www.bloomberg.com