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Originally published September 5, 2013 at 8:34 AM | Page modified September 5, 2013 at 8:36 AM

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US service firms expand at fastest pace in 8 years

Companies in the U.S. service sector expanded at their fastest pace in nearly 8 years last month as sales and orders grew and employers ramped up hiring.

AP Economics Writer

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WASHINGTON —

Companies in the U.S. service sector expanded at their fastest pace in nearly 8 years last month as sales and orders grew and employers ramped up hiring.

The Institute for Supply Management said Thursday that its service-sector index rose to 58.6 in August from 56 in July. It's the highest point since December 2005. Any reading above 50 indicates expansion.

A measure of hiring rose to 57, the most in six months. That's an encouraging sign for the job market because the service sector employs 90 percent of the U.S. workforce, including retail, construction, health care and financial services.

On Friday, the Labor Department will issue the August jobs report.

Consumers appear to be spending more at auto dealerships, retailers, hotels and restaurants. The housing recovery is also spurring growth in real estate.

The report "implies that the economic recovery is gathering a real head of steam," said Paul Dales, an economist at Capital Economics.

The upbeat figures come after another report Thursday showed that weekly applications for unemployment benefits fell to nearly their lowest level in five years. Also, a private survey found that U.S. businesses added 176,000 jobs last month, below the previous month but roughly in line with the average gain this year.

All told, Thursday's reports suggest that the job market is improving steadily. That will weigh heavily in the Federal Reserve's deliberations when it meets later this month to consider whether to slow its monthly bond purchases.

Many economists think the Fed will scale back its bond buying, which has been intended to keep long-term borrowing rates near record lows.

A measure of sales in the ISM report rose to its highest level in nearly three years. And new orders reached their highest point since February 2011. That suggests that sales for service companies will remain robust in coming months.

Employers likely added 177,000 jobs in August, economists forecast, while the unemployment rate was likely unchanged at 7.4 percent.

The service sector's outsize role in hiring has raised some concern about the quality of the jobs gained this year. Many of the jobs have been part-time positions in industries with generally low pay, such as hotels, retailers and restaurants.

By contrast, generally better-paying industries such as manufacturing and construction have shed jobs in the past four months.

Overall income rose just 0.1 percent in July, down from 0.3 percent the previous month. Slower growth in wages forced Americans to restrain spending last month. Consumer spending rose a scant 0.1 percent in July. Consumer spending drives roughly 70 percent of economic activity.

On Monday, the ISM said factory activity grew at the fastest pace in more than two years in August. New orders jumped to their highest level since April 2011 and export orders rose at a healthy clip.

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