Service sector seen shrinking in August

NEW YORK (Reuters) - The U.S. service sector likely shrank modestly in August, as a pullback in consumer spending pinched retailers and other non-manufacturing industries for a second straight month.

The Institute for Supply Management's index on national service activity likely held at 49.5 in August, unchanged from July, according to analysts polled by Reuters.

A reading below 50 suggests contraction in the sector.

Among the 79 analysts polled, the forecasts on the August ISM non-manufacturing reading ranged from 48.5 to 53.0.

If the index were to come in below 50 in August, it would show the service sector shrinking in six out of the first eight months of this year.

Meanwhile, the smaller manufacturing portion of the economy has not fared much better, although strong exports have offset the slump in domestic demand, analysts said.

On Tuesday, ISM said its U.S. manufacturing activity index dipped to 49.9 in August versus 50.0 in July.

ISM will release its non-manufacturing index at 10 a.m. EDT on Thursday.

Here is a selection of comments from economists:

ACTION ECONOMICS

Forecast: 50.5

"Historically, the ISM-NMI composite index outperforms the ISM. But June and July was the rare situation where ISM headline outperformed the ISM-NMI."

"The mix of producer sentiment measures is expected to leave an average ISM-adjusted reading in August close to the 50 reading in July, and follows prior averages of 49 in each month of Q2, 48 in March, and a recent trough of 47 in February."

MERRILL LYNCH

Forecast: 51.0

"Conditions in sectors covered by this survey have been generally soft. Construction activity has deteriorated, with housing starts tumbling to a 17-year low in July and homebuilder sentiment still at an all-time record low. Retailing activity also fell in July and the more recent weekly chain-store sales figures in August point to another decline, as the temporary boost from the tax rebates fades."

UBS SECURITIES

Forecast: 49.5

"The weakening momentum likely continued into August. Our estimated 'all-economy' ISM index (which combines the manufacturing and non-manufacturing surveys) will likely show the same pattern."

(Polling by Bangalore Polling Unit)

(Reporting by Richard Leong; Editing by Leslie Adler)

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