The Institute for Supply Management said Monday that its index of service-sector growth rose in July to 56.0, up from 52.2 in June. Any reading above 50 indicates expansion.
The survey covers businesses that employ 90 per cent of the workforce, such as retail, construction, health care and financial services.
A measure of business activity, which includes current sales, rose to 60.4. That's the highest since December and was driven in part by faster home construction. And a gauge of new orders, which indicates sales over the next few months, increased to 57.7 — a five-month high.
Jennifer Lee, senior economist at BMO Capital Markets, noted that 16 of the 18 industries surveyed reported growth in July, "encouraging news for the broader U.S. economy."
Paul Dales, senior U.S. economist at Capital Economics, said the July gains in the service sector, along with a solid month of manufacturing growth, suggest the economy is growing at an annual rate of 3 per cent in the July-September quarter. That's nearly double the rate in the April-June quarter.
One concern is that a measure of employment at service companies fell in July. That echoed last week's government employment report that showed hiring has slowed.
Employers added 162,000 jobs last month, the Labor Department said Friday. That's down from 188,000 in June. Nearly all of the hiring took place at service firms. And most new jobs were in low-paying industries — half were at retail business or restaurants and bars.
Growth in the service industry depends largely on consumers, whose spending drives roughly 70 per cent of economic activity. On Friday, the government said consumers increased their spending in June at the fastest pace in four month.
The economy grew at a tepid 1.7 per cent annual rate from April through June. That's up only slightly from the 1.1 per cent annual rate in the previous quarter and the third straight month of subpar economic growth.
Still, the rise in consumer spending and service activity follows other reports that point to stronger growth.
Home sales and prices continue to rise, and Americans' confidence in the economy stayed last month close to a 5 1/2 -year high.
U.S. factories have begun to rebound after slumping at the start of the year. A separate ISM released last week showed manufacturing activity jumped in July to the highest level in two years, reflecting a surge in new orders, increasing hiring and rising factory output.
Businesses have ordered more industrial machinery and other equipment for four straight months. Steady gains in new-home sales and construction are supporting strong growth in industries such as wood products, furniture, and electrical equipment and appliances. And healthy auto sales are buoying growth in the production of metal parts and components.