(snip)"U.S. ISM Services Index Falls in March as Costs Rise (Update2)

By Shobhana Chandra

April 4 (Bloomberg) -- Service industries in the U.S. expanded at a slower rate last month as costs increased, raising concern the housing slump is spilling over into other parts of the economy.

The Institute for Supply Management's index of non- manufacturing businesses including banks, builders and retailers slid to 52.4, the lowest in almost four years, from February's 54.3, Tempe, Arizona-based ISM said today. Readings above 50 point to growth in services.

The slowdown in services, which make up almost 90 percent of the economy, raises doubt about the economy's ability to keep expanding at the ``moderate'' pace forecast by the Federal Reserve. Consumer demand is softening as rising defaults on subprime mortgages deepen the housing slump. Manufacturing growth also slowed last month.

``Business sentiment is weakening,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ``Sales are slowing, and businesses are looking out and seeing that it's going to be harder to make money because costs are rising.''

Prices Jump

The institute's measure of prices paid, a gauge of operating costs, rose to 63.3, the highest since August, from 53.8.

The main index was expected to rise to 55, according to the median forecast in a Bloomberg News survey of 67 economists. Estimates ranged from 52.5 to 57.1. The index has averaged 57.8 since its inception in July 1997.

A government report showed orders placed with U.S. factories rose 1 percent in February with a jump in aircraft demand. Excluding transportation equipment, orders fell, the Commerce Department said today in Washington.

The ISM report showed the institute's index of new orders for non-manufacturing industries fell to 53.8 from 54.8 in February.

An index of employment fell to 50.8 from 52.2, and a gauge of inventories rose to 52 from 50.5. An index of backlogs rose to 52.5 from 47 the prior month.

The group's manufacturing report earlier this week showed factories slowed activity while raw-materials costs jumped, adding to concerns that a cooling economy is failing to damp inflation. "(snip)