The U.S. service sector contracted in July at a faster pace than in June, adding to worries that any economic recovery may still be a long way off, according to a report released on Wednesday.
The Institute for Supply Management's services index fell to 46.4 last month from 47.0 in June, below economists' median forecast for a rise to 48.0. The dividing line between growth and contraction is 50.
There is a clear lag in the recovery in the services sector, which reflects the anemic consumer part of the economy, said Richard DeKaser, president of Woodley Park Research in Washington.
The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.
U.S. stock markets extended losses, while Treasury debt prices shed losses and turned higher following the release of the data.
The last time the index was above 50 was in August 2008, which was followed by a reading of 50.0 in September 2008.
The prices paid component of the index fell to 41.3 in July from 53.7 in June, while the new orders index eased to 48.1 from 48.6 in June.
The employment index fell to 41.5 in July from 43.4 the previous month.
The dip in the employment component added to worries that the size of any contraction in non-farm payrolls in July, to be released by the government on Friday, might be larger than originally forecast.
Those worries had already been fueled by the ADP Employer Services report earlier on Wednesday showing a bigger-than-expected contraction in private payrolls in July.
This is not good news for the labor market given the disappointing ADP reading -- it doesn't bode well for the July payroll reading, DeKaser said.
The median of forecasts from analysts polled by Reuters is for non-farm payrolls to have contracted by 320,000 in July, after the loss of 467,000 jobs in June.
(Additional reporting by Richard Leong, Editing by Chizu Nomiyama)