Economic reports earlier this week on home sales and manufacturing had been encouraging, but Wednesday's figures sent a reminder that the economy remains sluggish.
"People assumed it was safe to go back outdoors, but it's still raining," said David Wyss, chief economist at Standard & Poor's.
"It's just not raining quite as hard."
The Institute for Supply Management said its services index registered 44 in May, up slightly from 43.7 in April. It was the highest reading since October. Service industries such as retailers, financial services, transportation and health care make up about 70 percent of U.S. economic activity.
But the ISM figure marked its eighth straight monthly decline, and it fell slightly below economists' expectations. Any reading below 50 indicates the services sector is shrinking. The last time the index was at 50 or higher was in September.
Separately, the government reported that orders to U.S.
factories rose 0.7 percent in April, the second increase in three months.
But the Commerce Department's report fell short of analysts' expectations. And the government also marked down the March figure to a 1.9 percent drop, from the 0.9 percent decline previously reported.
Wall Street fell after the disappointing figures were released. The Dow Jones industrial average dropped more than 65 points to 8,675.24. Broader averages also declined.
Federal Reserve Chairman Ben Bernanke, meanwhile, said Wednesday that the economy will begin growing later this year, but the improvement will be slight.
"We expect that the recovery will only gradually gain momentum," he told lawmakers. "Businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes."
The current recession, the longest since World War II, began after the bursting of the housing bubble led to a financial crisis last fall. Economists say recoveries after such crises tend to be slower, as credit remains tight even after growth returns.
The report from ISM, a Tempe, Ariz.-based trade group of purchasing executives in 18 industries, is based on a survey of the institute's members. It covers indicators such as new orders, employment and inventories.
The latest report on the U.S. services economy came as the European services sector also showed improvement. A British measure rose past 50 in May, signaling expansion. It was the first growth reading since April 2008. And a reading for the 16-nation euro zone's services sector in May was revised upward to a seven-month high.
In the U.S., six of the service industries surveyed reported growth, including real estate, retail and food services.
But all-important consumer spending dipped 0.1 percent in April, even as Americans' incomes rose, the Commerce Department said this week. It was the second straight month that consumers cut back after a spending burst earlier this year. Any growth in the services sector will be fueled by the willingness of consumers and businesses to buy.
The factory orders report Wednesday showed little sign of a recovery in business spending. Orders for non-defense capital goods excluding aircraft - regarded as a proxy for business investment - fell 2.4 percent in April.
The ISM report said new orders, essential for businesses' expansion, fell to 44.4 last month from 47 in April, a big disappointment. The new orders are a trigger for ramping up production and hiring. They had risen from 38.8 in March, providing hope for a turnaround.
The ISM companion index for manufacturing on Monday showed new orders in May turned positive for the first time since November 2007.
Employment in the ISM report inched up to 39 in May from 37 the previous month, indicating the 16th month of contraction in 17 months. While the current level is a seven-month high, it still implies 250,000 job losses a month in the services sector, said Paul Ashworth, senior U.S. economist at Capital Economics.
The unemployment rate, now at a 25-year high of 8.9 percent, is expected to reach 9.2 percent when the government releases the May employment report Friday. Many economists expect the rate to top 10 percent by year's end.
Economists also project that employers cut a net total of 520,000 jobs in May, an improvement from the average of 700,000 in the first quarter of this year but still a huge drop in employment.
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