By Courtney Schlisserman Aug. 5 (Bloomberg) -- U.S. service industries unexpectedly contracted at a faster pace in July as concern over rising unemployment gripped consumers. The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 46.4 from 47 in June, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction. The report indicates that most of the economy has yet to benefit from government programs, such as the cash-for-clunkers plan, aimed at reviving manufacturing. The highest jobless rate in a quarter-century, stagnating wages, falling home values and mounting bankruptcies mean consumer spending will be slow to recover. “The consumer is still facing a weak labor market,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “There are still plenty of problems out there. To declare everything is fine is premature at this stage.” Economists forecast the index would rise to 48, according to the median of 77 projections in a Bloomberg News survey. Estimates ranged from 44 to 49.3. Other reports today showed the economy lost more jobs last month. Companies cut an estimated 371,000 jobs in July, more than economists had forecast, according to figures from ADP Employer Services. Market Reaction Stocks dropped after the reports and Treasury securities rose, recovering from earlier losses. The Standard & Poor’s 500 index fell 0.9 percent to 996.28 at 1042 a.m. in New York. The yield on the benchmark 10-year note was 3.66 percent compared with 3.69 percent late yesterday. The ISM non-manufacturing industries employment index fell to 41.5 from 43.4 the prior month, and its gauge of new orders decreased to 48.1 from 48.6. The measure of new export orders slumped to 47.5 from 54.5. The Labor Department’s July jobs report is due Aug. 7. The U.S. has lost 6.5 million jobs since the recession began in December 2007, the biggest decrease of any economic slump since the Great Depression. Simon Property Group Inc., the biggest U.S. shopping-mall owner, reported a drop in second-quarter earnings excluding items and a decline in revenue as the recession hurt consumer spending. The Indianapolis-based company yesterday cut its forecast for the year. ‘Difficult’ Environment “The economic and retail environments remain difficult,” Chief Executive Officer David Simon said in a conference call. Even companies seeing better times are concerned a recovery will be slow to develop. Wyndham Worldwide Corp., the franchiser of Ramada and Super 8 hotels, reported last week that it beat second-quarter earnings estimates. “People are taking shorter vacations and staying closer to home,” Chief Executive Officer Stephen Holmes said in an interview with Bloomberg News after the earnings release on July 29. “We see that shift continuing through the rest of the year. We don’t see this as being a quick rebound.” Housing, a component of the ISM non-manufacturing index, is one area showing signs of improvement from its worst slump since the 1930s. Construction of single-family houses jumped in June by the most since 2004, figures from the Commerce Department showed last month. Combined sales of new and existing houses climbed in June for a third consecutive month, reaching the highest since October, figures from Commerce and the National Association of Realtors also showed. To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

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