updated 8/4/2004 11:53:44 AM ET 2004-08-04T15:53:44

July saw service sector activity heat up strongly and mark a 16th straight month of growth, even as employment conditions softened, according to a report released Wednesday.

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The Institute for Supply Management said its non-manufacturing index for last month moved to a robust reading of 64.8, versus the 59.9 seen in June and 65.2 in May.

The non-manufacturing index covers activity in the service sector, which makes up a large majority of overall U.S. economic activity. Readings in the survey and its components above 50 indicate the breadth of growth seen, but do not describe the size of the gain seen by individual survey respondents.

The July reading proved better than the 61.5 mark forecasters expected it to hit. The survey joins other numbers, like the ISM’s report on manufacturing, that suggest that July was a solid month for the economy.

”July’s index indicates continued growth across most non-manufacturing industries,” the ISM said in its report, noting that the service sector has grown in every month except March 2003, since February 2002. ”In July, 12 industry groups reported growth, one indicated contraction, and four reported business unchanged from June,” the group said.

The components comprising the non-manufacturing ISM were generally positive. The group’s employment index stood at 50.0 in July, indicating no growth, after 57.4 in June and 56.3 in May. Meanwhile, the ISM service sector new orders index increased to 66.4, versus 62.4 the month before.

The ISM noted that the flat performance of hiring in July broke a nine-month streak of gains, and said comments by survey respondents were not particularly conclusive in terms of their reading on hiring.

“I believe that the employment component tracks the Labor Department’s non-manufacturing employment pretty well, but I would emphasize that the index actually was 52 before seasonal adjustment. So, the increase was all seasonal,” survey director Ralph Kauffman said in a conference call with reporters.

The same rising tide of prices that’s been seen in the rest of the economy, and in numerous other economic reports, didn’t pass by the service sector. The ISM reported its prices index for July stood at a briskly expanding 73.1, a slightly slower rate of increase relative to the 74.6 seen in June. Prices have risen for 28 straight months for service businesses.

Kauffman also told reporters that there were ”some comments about transportation bottlenecks,” referring to the rise in the supplier delivery index, which indicates slower deliveries. ”Comments ranged from concerns about limited availability of trucks to slower rail deliveries. There were also some comments about low product availability because of unexpected demand strength, but transportation bottlenecks seemed to be the bigger concern.”

The July non-manufacturing data appear to suggest the largest part of the U.S. economy expanded at a welcome pace last month. That’s good news for those who’ve become increasingly worried that a wide range of data that weakened in June indicated a faltering of what had been strong growth.

Federal Reserve officials have been skeptical of that idea, and Fed Chairman Alan Greenspan said in Congressional testimony last month consumer spending weakness was likely ”short lived.” Even with the relatively strong data seen so far for July, it’s still up the employment data, due for release Friday, to clearly address whether June was simply an aberrant month.

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