Service firms grow at fastest pace since 2006

WASHINGTON - Strong consumer demand pushed a key measure of the economy's service sector to its highest level in more than four years, the latest evidence that the economy is gaining strength and job growth could pick up in the new year.

The Institute for Supply Management, a trade group of purchasing executives, said Wednesday that its index of service sector activity rose to 57.1 in December. Any reading above 50 indicates growth.

Last month's reading was the highest since May 2006 and marked the 12th straight month of expansion for the sector, which employs 80 percent of the work force. The index plummeted to 37.2 in November 2008, at the height of the financial crisis. The sector contracted for all but two months in 2009, then began expanding last year.

A major reason for the gains is that people are spending more money. Companies covered by the survey - everything from health care to retail to financial services - received the highest number of orders for business in five years. That, along with a solid year of expansion, suggests the broadly defined sector could be an engine of job growth in 2011.

Economists say increased demand for services could set off a virtuous cycle: Rising employment gives consumers the confidence - and cash - to spend more, and that prompts businesses to increase hiring.

Earlier Wednesday, payroll services provider ADP said the economy added 297,000 private-sector jobs last month, the biggest increase since the company began tracking employment 10 years ago. The government is scheduled to issue the December employment report Friday.

"The spending side of the economy has turned a corner - a necessary step toward promoting the employment growth that will put the economy into a clearly self-sustaining expansion," Pierre Ellis, an economist at Decision Economics, wrote in a note to clients.

Still, the outlook for job growth is murky. The ADP report noted that 270,000 of the jobs added in December were in service industries. The ISM report was more conservative in estimating last month's job growth. While it doesn't give an actual number of jobs added, its employment index dipped to a level that showed slower growth. Paul Ashworth, an economist at Capital Economics, said ISM's reading is consistent with about 100,000 service sector jobs.

"Our suspicion is the truth lies somewhere in the middle," Ashworth said.

The service sector reading follows a similarly strong reading on U.S. factories. On Monday the group reported that manufacturing activity grew at its fastest pace in seven months.

The government is expected to report Friday that employers added a net total of 145,000 jobs in December and that the unemployment rate dipped to 9.7 percent from 9.8 percent in November.

Boosting expectations are reports that last month capped the strongest holiday shopping seasons in years. Consumers snapped up clothes, shoes, luxury goods and electronics. Analysts expect holiday sales rose at the fastest pace since 2006. Consumer spending accounts for 70 percent of economic activity.

Some retail chains are responding to the increased demand by expanding. Discount-store operator Dollar General Corp. said Monday that it will open 625 stores and hire more than 6,000 workers in 2011.

There is also some evidence that Americans are traveling more, giving a boost to hotels, restaurants and the airline industry. New York City received a record number of visitors in 2010, after travel to the city fell in 2009, Mayor Michael Bloomberg said Tuesday.

Nine industries reported increasing employment, the ISM said: Mining, retail trade, information, other services, utilities, finance and insurance, transportation and warehousing, professional services, and educational services. Seven said they have reduced employment and two reported no change.

The seven industries cutting jobs were: Construction; agriculture, forestry, fishing and hunting; arts, entertainment and recreation; hotels and restaurants; health care; government; and wholesalers.

Prices for many commodities are rising, the ISM report said, including metals such as copper and steel, gasoline, and agricultural goods such as cotton and sugar. That could cut into the profit margins of many companies, or force them to raise prices.