Service Sector Growth Rises Unexpectedly

The nation's economic slowdown may finally be coming to an end, with both the service and manufacturing sectors showing surprising strength in June even as prices for raw materials rise.

The Institute for Supply Management said Thursday its index of business activity in the non-manufacturing sector, which includes banking, retail and travel, registered 60.7 last month. The reading was higher than May's reading of 59.7 and Wall Street's expectation of 58.1.

It was the highest reading since April 2006, when it registered 61.1. A reading above 50 indicates expansion, while one below indicates contraction.

"It's a continuation of recent trends and shows the economy is firming up," said Gary Bigg, an economist with Bank of America.

The report followed Monday's ISM report that the manufacturing sector expanded at its fastest pace in at least a year. The index, which covers factories, plants and utilities among others, registered 56, higher than the May reading of 55 and the market expectation of 55.4.

Separately, the Labor Department reported Thursday the number of newly laid off people signing up for jobless benefits rose last week. The level of claims, though slightly higher than economists were expecting, was still in a range that pointed to a sturdy job market.

The service industries covered by the ISM report represent about 80 percent of economic activity and span diverse fields including banking, construction, retailing, mining, agriculture and travel. All 14 industries surveyed by the ISM reported growth, while none reported decreased business activity compared with May.

Strength in the new orders index, which registered 56.9, bodes well for growth in coming months, Bigg said. The employment index, another forward-looking indicator of business confidence, rose to 55 in June from 54.9 in May.

The prices paid index grew more slowly than in the previous month, suggesting inflation may be moderating. The index fell to 65.5 in June from 66.4 in May.

The service economy report is the latest sign that the economy may waking up from its nearly yearlong sluggishness.

"It's premature to say the economy is reviving in a consistent way, but I think it's safe to say the economy isn't going to weaken any further," said Mark Zandi, an economist with Moody's

Stocks were lower in midday trading. The Dow Jones industrials fell 38.05 to 13,539.25 while the Standard & Poor's 500 index slipped 3.23 to 1,521.64 and the Nasdaq composite index fell 1.06 to 2,643.89.

Trading volumes were expected to be low Thursday, with many traders taking time off after the July 4 holiday.

In deciding to hold interest rates steady last week, Federal Reserve Chairman Ben Bernanke and his central bank colleagues stuck to their forecast that economic activity would rebound.

Belt tightening by businesses worried about the effects of the slumping housing and automotive industries was a major factor behind the first-quarter's economic slowdown. In the January-March period, the economy grew at the weakest pace in more than four years.

Despite downturns in the automotive and housing industries, a strong job market has helped keep the economy going over the past year.

The Labor Department said new applications filed for unemployment insurance rose by a seasonally adjusted 2,000 to 318,000 for the week ending June 30. The level of claims was slightly higher than economists were expecting, but didn't darken the big picture of a mostly healthy employment climate across the country.

The four-week moving average of new claims, which smooths out week-to-week fluctuations, rose by 1,750 last week to 318,500, the highest since late April.

"(Unemployment claims) are elevated, but it's still a very low number," Zandi said.

Although job growth has cooled a bit, companies are still hiring at a decent pace. The unemployment rate is expected to hold steady at a relatively low rate of 4.5 percent. The government releases the June employment report on Friday.