The Institute for Supply Management reported Friday that its index of non-manufacturing activity picked up slightly last month with a reading of 52.6. That was a tiny improvement from June's reading of 52.1, which had been the lowest since January 2010. Still, any reading above 50 indicates expansion.
The service sector has now grown for 31 straight months. Even with the latest gain, the services index remains far below its recent high of 57.3 hit in February.
In July, part of the strength came from a rise in the index component which tracks new orders. Service companies include retail, construction, financial services, health care and hotels, among other industries.
Economists said the July reading was encouraging because it at least showed a small rebound from June's decline in activity.
Paul Dales, senior U.S. economist at Capital Economics, said an index reading at this level was consistent with growth in the overall economy at a sluggish pace of 1 per cent to 1.5 per cent in the current July-September quarter.
"Although it is encouraging to see the survey strengthen, it still appears as though the economy started the third quarter on a fairly weak note," Dales said.
Overall economic growth, as measured by the gross domestic product, slowed to an annual rate of 1.5 per cent in the April-June quarter, down from an already lacklustre pace of 2 per cent in the January-March period.
U.S. employers have scaled back on hiring and for those who are working, paychecks are barely keeping pace with inflation, making consumers less confident in the economy.
Consumer spending, which drives 70 per cent of economic activity, has been weak in recent months. Consumers spent no more in June than they did in May, a month when spending actually fell. However, there was a glimmer of hope that things might be looking up for retailers.
Many major retailers reported better-than-expected results in July, saying that sales had been helped by hot weather and summer clearance sales. A tally by the International Council of Shopping Centers of 20 major retailers found revenue in stores open at least a year rose 4.6 per cent in July, compared to activity in July 2011.
A separate ISM report this week showed that manufacturing shrank for the second straight month in July. The ISM said its manufacturing index stood at 49.8, little changed from a June reading of 49.7, which had been the first time the survey showed manufacturing contracted in three years.
In recent months, factory activity has weakened along with the broader economy. Manufacturers have been hurt not only by a slowdown in consumer spending in the United States but by Europe's economic problems and slower growth in China and other emerging markets which has dampened demand for U.S. exports.
The Federal Reserve at a meeting this week decided to hold off providing further support to the economy but signalled that more help could be on the way if economic growth does not revive. Many private economists believe the central bank will decide to launch another round of bond buying at the Fed's next meeting in September.