Activity in the U.S. service sector expanded in September for the first time since August 2008, while employment in the sector also improved, the Institute of Supply Management said on Monday.

In other data, the U.S. job market strengthened in September for the first time since January of last year, according to the U.S. Conference Board.

The better news on the economy followed monthly payrolls data on Friday from the U.S. Labor Department which showed employers unexpectedly cut more jobs in September than in August, underscoring the fragility of the U.S. economy's recovery from its worst recession in 70 years.

The market was due for some better-than-expected news after last week's wave of news that came in worse than expected, said John Canally, an economist with LPL Financial in Boston.

But a disappointment is that the job index is still below 50, which means companies are tentatively hiring, he said.

Still this may get people's mind off the jobs report and make them look at more forward looking indicators. For now, the recovery is still well in place.


The Institute for Supply Management's services index rose to 50.9 last month from 48.4 in August, above economists' median forecast for a rise to 50.0, which is the dividing line between growth and contraction. The last time the index was above 50 was in August 2008, which was followed by a reading of 50.0 in September 2008.

The index reading for September 2009 was the highest since it posted at 51.2 in May 2008.

This is a good way to start off the week after a sour nonfarm payrolls on Friday, said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. We need to see the service sector doing better because it's such a big part of the economy.

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

U.S. stocks edged up after the data with the benchmark Standard and Poor's 500 index <.SPX> around 1,034 while U.S. Treasury debt prices were little changed, leaving the benchmark 10-year yield around 3.18 percent. The U.S. dollar was little changed against other major currencies <.DXY>.

The prices paid component of the index fell to 48.8 from 63.1 in August while the new orders index rose to 54.2 from 49.9 in August, its highest since October 2007. The employment index rose to 44.3 last month from 43.5 in August. The reading for September was the highest since August 2008.

The employment component of the ISM data improved, which was a welcome development, and business activity picked up handsomely, Woolfolk said. New orders are also up big. This is a solid report that is consistent with a 'glass half full' outlook.

In other data, the U.S. job market strengthened in September for the first time since January of last year, the U.S. Conference Board said.

The private research group said its Employment Trends Index edged up to 88.5 from an upwardly revised 88.2 in August, originally reported at 88.1. The index is now down 15.6 percent from one year ago, the group said.

While the employment numbers reported by the government last Friday were certainly disappointing, The Conference Board Employment Trends Index suggests that the trend of declining job losses will continue, said Gad Levanon, senior economist at The Conference Board.

But the road to recovery is definitely going to be bumpy and may last unusually long, given the depth of the recession we have experienced.

(Additional reporting by Steven C. Johnson; Editing by James Dalgleish)