June 5 (Bloomberg) -- U.S. service industries unexpectedly grew last month at the fastest pace in more than a year, further evidence that the housing recession isn't dragging down the broader economy.
The Institute for Supply Management's index of non- manufacturing businesses increased to 59.7 from 56 in April, the Tempe, Arizona-based group said today. Readings greater than 50 point to growth in services such as banking, retailing and construction that make up almost 90 percent of the economy.
Bonds fell after the report, which also showed a measure of prices climbed to the highest since August and orders jumped. Federal Reserve Chairman Ben S. Bernanke said in a speech today that the real-estate decline will be prolonged, even as he projected the economy will weather the slump.
``It does look like growth is accelerating in the second quarter,'' said James O'Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. ``It certainly argues against the Fed easing any time soon.''
The report is the latest this month to suggest the economy, which last quarter grew at the slowest pace in more than four years, is picking up. Job growth quickened, manufacturing grew at a faster pace and consumer spending increased.
The index was projected to drop to 55.8, according to the median forecast in a Bloomberg survey of economists. The index has averaged 57.7 since its inception in July 1997.
New Goldman Forecast
Goldman Sachs Group Inc. abandoned its prediction the Fed will reduce interest rates from 5.25 percent this year and traders pared already-thin bets on a cut.
Traders saw a 12 percent chance of a reduction by the end of the year, compared with 18 percent yesterday, based on the price of futures on the Chicago Board of Trade. As recently as March, the futures showed investors considered a cut to 4.75 percent to be certain.
``The non-manufacturing sector keeps chugging along,'' Anthony Nieves, chairman of ISM's non-manufacturing survey, said on a conference call. Service industries ``are anticipating a strong stream of business.''
The institute's index of new orders for non-manufacturing industries rose to 57.4 from 55.5 the prior month. A measure of prices paid rose to 66.4 from 63.5.
An index of employment rose to 54.9 from 51.9, and a gauge of inventories rose to 61 from 52. An index of backlogs fell to 48 from 50 the prior month, today's figures showed.
Manufacturing
Another report by the supply management group last week showed manufacturing unexpectedly accelerated in May with a jump in new orders. The group's factory index rose to 55, the highest in 13 months.
Economists forecast growth will improve in coming months. Fed policy makers said ``downside risks'' to the expansion have ``diminished slightly,'' according to minutes of their May 9 meeting released last month.
The economy may have reached its low point last quarter, when it grew at an annual rate of 0.6 percent, according to revised estimates from the Commerce Department.
Consumer spending, getting a boost from rising employment and incomes, was one of the few drivers of growth last quarter, the Commerce report showed.
``The economy is returning to a strong expansionary mode,'' said Julia Coronado, a senior economist at Barclays Capital Inc. in New York.
Labor Market
Service industries added 176,000 workers in May after hiring 119,000 in April, a Labor Department report showed June 1. Overall, payrolls increased more than expected.
Earnings at retailers and restaurants reflect growth. Tiffany & Co., the world's second-largest luxury-jewelry chain, reported May 31 that first-quarter profit and sales each jumped 15 percent as customers spent more per purchase. Jack in the Box Inc., the operator of its namesake restaurants and Qdoba Mexican Grill, reported a 25 percent gain in second-quarter profit.
Housing remains an area of weakness in the services sector. While a government report showed sales of new homes surged in April, industry data for previously owned homes showed purchases fell for the month to the lowest level in almost four years.
Bernanke, speaking via satellite today to a conference in Cape Town, South Africa, said the housing slump hasn't spilled over into other parts of the economy and he maintained a forecast for ``moderate'' growth.
Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said it had a spurt of cancellations in March and April, and business remained slow last month. Pulte Homes Inc., the third-largest U.S. homebuilder, will fire 16 percent of its staff in its latest round of job reductions.
``The homebuilding environment remains difficult,'' Richard Dugas, chief executive officer, said in Pulte's statement.
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