NEW YORK (Bloomberg) — Service industries in the US barely expanded in December, underscoring Federal Reserve forecasts that the economic recovery will be slow to develop.

The Institute for Supply Management's index of non- manufacturing businesses that make up almost 90 percent of the economy rose to 50.1 from 48.7 in November, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction. Other reports yesterday showed job cuts are diminishing.

Services from retailing to transportation are lagging behind the rebound in manufacturing as consumer demand is restrained by tight credit and 23 months of job losses. Economists surveyed last month projected the pace of growth will keep unemployment above ten percent through the first half of this year, making it more likely central bankers will keep interest rates low for an "extended period."

"We're on a slow recovery path," said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado, who forecast a reading of 50. "The economy will grow enough to slowly reduce unemployment, but not nearly enough to get the public to perceive it as low."

The December figure compared with economists' median forecast for an increase to 50.5, according to 67 projections in a Bloomberg News survey. Forecasts ranged from 48 to 52.1.

The services index is up almost 13 points from a record low of 37.4 reached in November 2008, a period of mounting job losses, falling home and stock prices, and a lack of credit for businesses. The ISM began keeping records in 1997.

By comparison, the group's manufacturing index has increased 23 points since reaching a 28-year low in December 2008. The manufacturing gauge rose in December to the highest level since April 2006 as factories ramped up production to rebuild inventories and meet increasing global demand.

The ISM's employment index for services rose to 44 last month from 41.6 in November. Separate reports showed that while the labor market is improving, companies are still trimming their workforces.

Figures from ADP Employer Services showed companies cut an estimated 84,000 jobs in December, the fewest since March 2008. The decline last month was larger than the 75,000 decrease forecast by economists in a Bloomberg survey.

Planned payroll reductions dropped 73 percent in December from a year earlier, according to another report from the job placement firm Challenger, Gray & Christmas Inc.

The Labour Department may report tomorrow that employment was unchanged in December after almost two years of job cuts, according to a Bloomberg survey. The jobless rate probably stayed at 10 percent.

The non-manufacturing gauge of business activity, a measure of sentiment, rose to 53.7 in December from 49.6 a month earlier. The ISM's index of new orders dropped to 52.1 last month from 55.1 and a gauge of backlogs eased.

Categories in the ISM services survey include utilities and resources, health care, housing, and finance and insurance.

Retailers are offering discounts on merchandise such as Nike Inc. footwear to encourage sales. Nike, the world's largest athletic-shoe maker, said on December 17 that it's "cautious" about its outlook.

"While we're seeing hopeful signs of recovery in consumer sentiment around the world, macroeconomic indicators remain mixed," Chief Financial Officer Donald Blair said on a conference call.

Retailers may report same-store sales rose 1.8 percent in December, after 2008 marked the worst decline in more than 40 years, according to analysts' estimates compiled by Retail Metrics Inc. Retailers report monthly sales today.

The economy grew at a 2.2 percent annual pace in the third quarter following four quarters of contraction that marked the deepest recession since the 1930s.

Economists at JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley in New York are among those projecting the economy expanded by at least a four percent annual rate in the final three months of 2009. s