The Institute for Supply Management said Wednesday that its service-sector index rose to 56.3 in May, the best reading since August 2013. The figure is an improvement from the 55.2 posted in April. Any figure above 50 indicates expansion.
The report points to solid growth after a brutal winter caused the economy to shrink 1 per cent during the January-March quarter. The gains in new orders and the backlog of existing orders suggest a faster rate of hiring in the months ahead as businesses rush to meet the demand.
"With this level of activity and new orders in the pipeline, employment is going to have to come up," said Anthony Nieves, chairman of the ISM's services survey committee. "There is no way that companies will be able to sustain a good level of output if they don't have the bodies to do it."
The services survey covers businesses that employ 90 per cent of the workforce, including retail, construction, health care and financial services firms. The ISM is a trade group of purchasing managers.
New orders rose for the fifth consecutive month, up 2.3 points to 60.5 and the highest reading since January 2011. The production component also climbed to 62.1, its strongest level since December 2010. Of the 18 industries surveyed in the report, only the mining sector contracted last month.
Several other economic reports indicate that the economy is gaining momentum. The ISM's separate survey of manufacturers on Monday rose to 55.4 in May. Both production and orders notched solid gains.
Auto sales improved in May as well. On Tuesday, Chrysler, General Motors, Nissan and Toyota all reported double-digit sales gains year-over-year. Ford's sales rose a better-than-expected 3 per cent, while Hyundai's were up 4 per cent.
The government issues its May jobs report on Friday. Employers added 288,000 jobs in April, and the unemployment rate fell to 6.3 per cent. Economists expect 220,000 jobs were created in May, according to a FactSet survey.
But payroll processer ADP said Wednesday that private employers pulled back on hiring in May, adding just 179,000 jobs.