US services sector retreats again

Restaurants were just one part of the sector to experience growth

The US services sector contracted again last month but performed slightly better than expected, figures show.

The Institute for Supply Management's non-manufacturing index hit 49.5 in July, above June's 48.2 figure and better than the 48.5 forecast.

With any figure below 50 representing negative growth, the data reflects the fragility of the economy which relies on services for 80% of total output.

Analysts said the evidence pointed to a shallow rather than a severe recession.

While the sector shrank overall, some areas recorded growth including entertainment, recreation, hotels, restaurants, utilities and scientific and technical services.

The survey also revealed prices continued to rise for the sector, albeit at a slower rate than June when they hit their highest level since the index began 11 years ago.

Analysts said the decline in the non-manufacturing prices paid index may be welcomed by the Federal Reserve as a positive sign of easing inflation ahead of its decision on interest rates later on Tuesday.

Meanwhile the better-than-expected news was welcomed on Wall Street with US stocks extending their gains.

'Subdued' economy

Wells Fargo currency strategist Assili Serebriakov added: "The good news given how this economy has been pummelled by housing, subprime crisis, high oil prices, it's amazing that it's not even worse than it is."

However experts warned that, despite the figures beating expectations, the report was still weak.

"It still suggests a subdued profile for the economy... The economy is moving sluggishly," said Jon Basile, economist for Credit Suisse in New York.

The figures come days after a similar ISM report showed US factory activity was unchanged in July from June, contrary to forecasts for a contraction, while inflation pressures moderated.