The U.S. services sector, which accounts for more than two-thirds of the country's economic activity, notched its strongest growth rate in nearly a year in January as new orders and employment jumped, according to an industry report on Friday.
Employment in the services sector rose to a six-year high, the Institute for Supply Management reported. The gains signaled improvement in the labor market, which is considered critical to a robust economic recovery.
The Institute for Supply Management said its services index rose to a reading of 56.8 last month from a revised 53.0 in December. It was the highest level since February 2011.
A reading above 50 indicates expansion in the sector. Economists had expected the index to hold steady at 53.0, according to a Reuters survey.
The new orders index climbed to 59.4 from 54.6, while the prices paid measure edged up to 63.5 from 62.0. The employment index rose to 57.4 from 49.8.
If sustained, the gain in employment is consistent with private payroll growth of about 300,000 a month, Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note.
The government on Friday reported that the U.S. unemployment rate fell to an almost three-year low in January, as the economy created 243,000 jobs, the fastest pace of growth in nine months.
The economy still needs to generate 5.57 million more jobs just to get back to the pre-recession level of employment.
The day's data boosted Wall Street more than 1 percent and sent prices of Treasuries, a traditional safe-haven for investors, plunging.
The jobs report muted increased expectations that the Federal Reserve would opt for a third round of stimulus, or quantitative easing. The Fed, at its most recent meeting, had left the door open to more stimulus.
Economic growth is expected to back off in early 2012 from the 2.8 percent rate registered in the fourth quarter, though there are signs of underlying momentum.
"It is quite clear that conditions have improved. But we're reluctant to get too carried away just yet," Paul Dales, senior U.S. economist at Capital Economics, wrote. "It is worth remembering that the economy began both 2010 and 2011 strongly before fading later in each year. As the unwinding of the previous fiscal stimulus starts to bite and as global demand falters, something similar may be on the cards this year."
In Europe, the service sector grew for the first time in five months, while Britain's services also picked up at the fastest pace in nearly a year. But growth engine China saw its services slow, temperting optimism over the global economy.