Service Growth Surprises Wall St.

The nation’s service sector -- which encompasses industries such as banking, restaurants and insurance -- expanded at a faster pace in February than Wall Street economists had expected, a private research group said Friday.

The sector’s growth is another sign that the U.S. economy is on a firm footing, clearing the way for a Federal Reserve interest rate increase this month and possibly another in May.

The Institute for Supply Management said its non-manufacturing index rose to 60.1 in February from 56.8 in January. Wall Street economists had forecast a reading of 59. The ISM index is based on a survey of business executives.

A reading above 50 indicates the sector is expanding; below 50 points to a contraction.

The ISM’s report suggests “economic activity in the first quarter is pretty robust,” said Carl Riccadonna, economist at Deutsche Bank Securities Inc.

“February was better than expected,” said Sam Bullard, economist at Wachovia Corp. “Today’s report certainly puts an upward bias to another Fed rate hike in May.”

Economists said the strength in the employment component of the ISM’s non-manufacturing index and recent declines in requests for unemployment insurance benefits hint at a strong February jobs report.

That report, due Friday, may show that the economy added more than 200,000 nonfarm jobs last month.

Industries reporting growth in February included mining, insurance, business services and construction.

The ISM said its new-orders index rose to 56.2 from 56 and its employment index rose to 58.2 from 51.1. Its prices index, meanwhile, fell to 64.8 from 67.2.

The ISM found that survey respondents were “mostly positive concerning current business conditions,” Ralph Kauffman, who oversees the services report, said in a statement. “Price increases are still a topic of concern for a number of members.”

Although the price index declined in February, Kauffman said it “remains in a historically high range for the ISM non-manufacturing business survey.”