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    U.S. Services Index Beats Forecast, Easing Concerns of Prolonged Slowdown

    .S. Economy: Services Shrank Less Than Anticipated (Update2)

    By Courtney Schlisserman

    March 5 (Bloomberg) -- U.S. service industries contracted less than forecast last month, easing concern the world's largest economy is in a prolonged slowdown.

    The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of gross domestic product, rose to 49.3 from a record-low 44.6 in January. The Tempe, Arizona-based ISM says 50 is the dividing line between expansion and contraction.

    Stocks rallied and Treasury notes retreated after the figures, which followed a private report showing companies cut jobs in February for the first time in five years. Federal Reserve officials warned this week of the risk that economic growth will be even worse than their ``sluggish'' outlook.

    ``We are bouncing along the bottom of the economy's performance,'' David Resler, chief economist at Nomura Securities International Inc. in New York, said in a Bloomberg Television interview. ``We are close to recession-like conditions, but we are not completely in them yet.''

    Economic growth slowed in eight of the 12 Fed regions since the start of the year, hurt by weakening retail sales and manufacturing and a continued decline in housing, the central bank said today in its Beige Book.

    A separate report from the Labor Department today showed productivity grew faster than the economy in the fourth quarter as businesses reduced employees' hours to rein in costs. The Commerce Department said factory orders fell 2.5 percent in January, matching economists' projections.

    Labor Costs

    Productivity, a measure of efficiency, rose at a revised annual rate of 1.9 percent after a 6.3 percent gain in the previous three months. A gauge of staff expenses increased more than forecast while prior quarters were revised down.

    ``Productivity growth is still OK,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, who accurately forecast the gain. ``Companies are facing all sorts of problems with commodity costs, but they seem to be doing pretty well in holding down labor costs.''

    Economists had forecast the ISM index would rise to 47.3 for February, according to the median of 64 estimates in a Bloomberg News survey. Projections ranged from 43 to 52.

    The Standard & Poor's 500 stock index climbed following the reports and then turned lower later in the day on speculation a plan by Ambac Financial Group Inc. to raise $1.5 billion in capital won't be enough to salvage the bond insurer. The index fell 0.1 percent to 1327.7 at 2:16 p.m. in New York. Treasuries dropped, sending 10-year note yields to 3.67 percent, from 3.63 percent.

    `Significant' Risks

    Fed Governor Frederic Mishkin said yesterday there are ``significant'' risks to a forecast that already anticipates ``sluggish'' growth this year. Vice Chairman Donald Kohn told lawmakers that Fed policy makers are ``very conscious'' of the threats to the economy and are considering whether ``we have adequate insurance'' against a deeper slump.

    The central bank releases its report on regional economic conditions, known as the Beige Book, at 2 p.m. today.

    Investors expect the Fed will lower the benchmark interest rate by end of the next meeting on March 18, and see equal chances of a 0.75 percentage point cut, to 2.25 percent, or a half-point reduction, futures prices show.

    The institute's employment gauge rose to 46.9, from 43.9 in January. The index for non-manufacturing businesses activity climbed to 50.8, from 41.9 in January, which was the lowest since October 2001.

    Orders, Deliveries

    The institute's measure of new orders increased to 49.6 from 43.5 in January. The supplier deliveries' index rose to 50 from 49.

    Consumer spending is slowing as the labor market weakens and higher energy and food prices leave Americans with less disposable income. Spending after adjusting for inflation was unchanged in January, the Commerce Department said Feb. 29 and disposable income increased 0.1 percent.

    The Labor Department is scheduled to release its monthly payrolls report on March 7. Economists surveyed by Bloomberg News forecast employers added 25,000 workers to payrolls last month following the first decline in more than four years.

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