The giant U.S. service sector staged its broadest expansion in six years in July as orders flowed in at an unprecedented rate, an industry report showed Tuesday.
The Institute for Supply Management's index for retailing, financial services and other non-manufacturing companies unexpectedly rose to 65.1, the highest since the survey began in July 1997. In June, the index jumped to 60.6. Readings above 50 indicate expansion.
Fourteen of 17 industries expanded in July, led by construction, farming, finance and banking and retail.
A surge in new orders to a record 66.9 from 57.5 and the second straight expansion in an employment measure suggest hiring may be about to pick up, further boosting growth.
"It's a really good hint that by September or October employment will be taking off, because at some point these companies can't expand without more people," said Russell Sheldon, a senior economist at BMO Nesbitt Burns Inc. in Toronto.
Some economists said Tuesday's reading may overstate the strength of the recovery and cautioned that the report can be volatile and has only a six-year track record.
Expansion in services, which account for about 85% of the economy, is being accompanied by a pickup at manufacturers. Several reports last week showed the economy is strengthening. The Institute for Supply Management said Friday that its manufacturing index expanded in July for the first time since February.
"We noticed a substantial uptick in our order rate about six or seven weeks ago," said Thomas Usher, chief executive of U.S. Steel Corp. "It's been fairly strong. In fact, it's been in excess of our ability to produce."
Since the end of the recession in November 2001, the services gauge has signaled expansion in 18 of the last 20 months. The services index is based on a survey of more than 370 non-manufacturing companies.
The only industry that reported a contraction in July was health services.
The highest growth rates for new orders were reported in agriculture, communications, finance and banking, construction and utilities. No industries reported falling orders. Order backlogs rose to 54.5 from 51.5.
The employment index rose to 50.7 from 50.3. It was the first time jobs grew in consecutive months since before the recession began in March 2001. Insurance, construction, finance and banking, retailers and communications companies reported the highest rates of employment growth.
The group's index of prices paid, a measure of costs for purchased materials and services, fell to 50.6 from 51.4 in June. The inventory index rose to 49.5 from 47 in the previous month.