NEW YORK – The U.S. services sector (search) grew more strongly than expected in June, bolstered by stronger employment but tempered by hints of rising inflation, according to the Institute for Supply Management's (search) survey published Wednesday.
The Institute for Supply Management's services index rose to 62.2 in June, the highest level since March and well above Wall Street's median forecast of 58.0 and May's 58.5 reading.
A number above 50 indicates growth in the sector which accounts for about 80 percent of the U.S. economy and includes businesses like hair salons, restaurants, hotels and airlines.
That's a positive for the economy, especially as we look forward to the government's monthly payrolls report on Friday," said Patrick Fearon, senior economist at A.G. Edwards and Sons in St. Louis, Mo.
Economists surveyed by Reuters on average look for a jump in June payrolls of 188,500, up from May's weak 78,000 rise.
However, the ISM survey showed indications of rising inflation, which could bolster the Federal Reserve's (search) resolve to continue raising official U.S. interest rates. The survey's prices paid index rose to 59.8 from 57.9.
"It ... could raise the specter of higher inflation," Fearon said, adding "this goes into the basket of arguments for continued Fed interest rate hikes."
However, the prices paid index may have been boosted by soaring oil prices rather than any jump in consumer demand.
"It's pretty hard to say that much of this price pressure is coming from demand — energy prices are still probably the main root cause for the higher prices," Ralph Kauffman, chair of the ISM's non-manufacturing business survey committee, told a teleconference.
Also, new orders edged down to 59.5 from 59.7, although economists saw the overall tone of the index as positive for the economy.
"We had some softness early in the second quarter and that appears to have firmed up," said Alan Gayle, a managing director at Trusco Capital Management in Atlanta. "I view the glass as half full, not half empty. The Fed came out last week and said the same thing — the ISM numbers support that view."
U.S. Treasuries slightly pared gains on the data, showing resilience in technical buying after two days of price losses.