By Lucia Mutikani

WASHINGTON (Reuters) – U.S. services industry growth slowed a bit in February amid a decline in employment, but a measure of new orders increased to a six-month high, pointing to underlying strength in the sector.

Despite the weakness in employment, comments from services businesses in the Institute for Supply Management (ISM) survey on Tuesday were generally upbeat, and suggested labor shortages remained a constraint for some. There were also no signs that inflation was picking up after a jump in prices at the start of the year, welcome news for Federal Reserve officials.

Though financial markets expect the U.S. central bank to start cutting interest rates this year, the timing is uncertain because inflation remains high, with most of the price pressures coming from services such as housing and utilities as well as finance, healthcare and recreation.

“While the easing of price pressure and moderation in hiring tilt this report in a dovish direction, the Fed will ultimately want to see these developments translate to the hard data on inflation and job growth,” said Tim Quinlan, senior economist at Wells Fargo in Charlotte, North Carolina.

The ISM said its non-manufacturing PMI slipped to 52.6 last month from 53.4 in January. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the index little changed at 53.0.

The PMI was consistent with continued economic expansion, despite 525 basis points worth of interest rate hikes from the Fed since March 2022. Fourteen services industries reported growth last month, including construction, retail trade, and public administration, as well as utilities and wholesale trade.

Arts, entertainment and recreation, mining and real estate, rental and leasing reported contraction. A measure of new orders received by services businesses increased to 56.1 last month, the highest level since last August, from 55.0 in January. Export orders, however, slowed after surging in January.

Production accelerated, with a measure of business activity hitting a five-month high of 57.2 from 55.8 in January.

Stocks on Wall Street were trading lower. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

UPBEAT COMMENTS

Retailers said “business is good,” adding “inflation is under control and trending downward.” Construction businesses reported that “materials levels have returned to pre-coronavirus pandemic levels, and the outlook for 2024 is strong.”

Professional, scientific and technical services providers said they were “experiencing stabilization from external economic influences,” while accommodation and food services businesses reported that “Red Sea issues have not yet impacted our purchasing conditions,” a reference to attacks on shipping there.

The increase in services inflation slowed last month. A gauge of prices paid for inputs by businesses fell to 58.6 from an 11-month high of 64.0 in January. That supports most economists’ views that the pickup in inflation in January was driven by beginning of year price hikes, which were unlikely to repeat in February.

“The underlying trend suggests that services inflation will remain on a downward trend in the first half, with some risk that it may not cool as quickly as Fed officials would like,” said Oren Klachkin, financial market economist at Nationwide.

There was also encouraging news on the supply side. The supplier deliveries measure decreased to 48.9 after rebounding to 52.4 in January. A reading below 50 indicates faster deliveries. The drop in this measure contributed to the fall in the services PMI.

The survey’s measure of services sector employment decreased to 48.0 from 50.5 in January. Employment levels were likely depressed by a combination of worker shortages and layoffs.

Anthony Nieves, chair of the ISM Services Business Survey Committee said comments from businesses included “we have lost employees due to normal attrition and are having issues backfilling these positions” and “currently holding at post-peak employment levels, however, planning to bring in new associates as spring approaches.”

Providers of utilities reported “labor continues to be in highest demand,” adding “finding qualified and available crews and administrative staff is still difficult.” Businesses offering management of companies and support services said “employers remain cautious about hiring direct employees and are considering utilizing contract labor to cover project.”

Coming on the heels of a decline in factory employment in February, that would suggest a considerable slowdown in job growth. The ISM services and manufacturing employment measures have not, however, been reliable gauges when trying to predict nonfarm payrolls employment. Nonetheless, the labor market is cooling, with a Conference Board survey last Tuesday showing consumers less upbeat about the jobs market.

The government is expected to report on Friday that nonfarm payrolls increased by 200,000 jobs in February after surging 353,000 in January, according to a Reuters survey of economists. The unemployment rate is forecast unchanged at 3.7%.

“The ISMs have not been reliable bellwethers of payrolls since the pandemic,” said Mark Streiber, economic analyst at FHN Financial in New York.

(This story has been refiled to add a dropped word, in paragraph 2)

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Jonathan Oatis)

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