updated 2/3/2010 12:05:12 PM ET 2010-02-03T17:05:12

The economy's service sector grew slightly in January, while the pace of job losses slowed, signaling a recovery still struggling to gain strength.

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The Institute for Supply Management said its service sector index rose to 50.5 last month from a downwardly revised 49.8 in December. Economists polled by Thomson Reuters had expected a higher level of 51. Still, it was the index's strongest reading since May 2008.

Any reading above 50 signals growth. That threshold was broken in September for the first time in 13 months. The service sector's recovery has been bumpy since, shrinking in November and December.

"Outside the factory sector, the economy is hardly growing, largely because of continued weakness in construction and lackluster retail activity," said Sal Guatieri of BMO Capital Markets in a note to investors. He said that a still-strapped consumer suggested the recovery "remains at risk" as government programs supporting the housing market end this spring.

On Monday, ISM said its manufacturing index jumped to 58.4 in January — its strongest point since 2004 — from 54.9 in December.

Overseas sales and the restocking of inventories has helped manufacturing grow much faster than the service sector, pumping up economic output in the U.S.

The service sector, however, relies more on U.S. consumers — "who are broke," said Ian Shepherdson of High Frequency Economics.

And it is the service sector that generates jobs in this country. The ISM report Wednesday does show job losses moderating, with the employment index improving to 44.6 in January from 43.6 in December. Still, its the 25th straight month of jobs contraction.

The service-sector gauge is closely watched because service jobs comprise more than 80 percent of non-farm U.S. employment. The service sector is highly dependent on consumer spending, which powers about 70 percent of the economy.

ADP, a payroll company, reported Wednesday that 22,000 non-farm, private jobs were cut last month. That was the best showing since employment started to decline in February 2008. But outplacement firm Challenger Gray & Christmas said employers cut payrolls by more than 71,000 workers, the biggest amount in five months.

The government is scheduled to report January employment data on Friday. Economists expect the Labor Department to say that employers added 5,000 jobs last month, but that the unemployment rate rose to 10.1 percent from 10 percent in December.

Late last month, Wal-Mart Stores Inc. said it would cut about 11,200 jobs at Sam's Club warehouses as it turns over the task of in-store product demonstrations to an outside marketing company.

Elements of the report suggested that there could be more growth in the future, however. New orders, a signal of business activity to come, picked up in January, expanding for the fifth straight month. Business activity also expanded in January, although more slowly than in December.

More sales for the country's hospitals, shops, retail, financial services companies or shippers should mean that service companies will be more inclined to hire.

Of the 18 industries ISM surveyed, however, only four grew — other services, which include a grab bag of smaller sectors such as advocacy, dry cleaning and machinery repair; utilities; information and wholesale trade. Eleven industries were still shrinking, led by arts and entertainment, mining, retail and transportation. Three didn't shrink or grow in January.

The uncertainty of the economic recovery could be holding back companies from hiring despite a pickup in business, said Joel Naroff, president and chief economist at Naroff Economic Advisors.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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