(Bloomberg) -- The US service sector expanded in June at the fastest pace in four months as business activity and orders quickened.

The Institute for Supply Management’s overall gauge of services increased 3.6 points — the most since the start of the year — to 53.9 last month. Readings above 50 represent expansion, and the index exceeded all forecasts in a Bloomberg survey of an economists.

In a welcome sign on inflation, the group’s measure of prices paid for materials and services dropped to the lowest level since March 2020.

The business activity index, which parallels the group’s factory output gauge, jumped to a five-month high of 59.2, the Thursday data showed. The new-orders gauge, a proxy of future activity, also increased.

“The majority of respondents indicate that business conditions remain stable; however, they are cautious relative to inflation and the future economic outlook,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement.

Fifteen service industries reported growth last month, led by accommodation and food services, entertainment and recreation, and real estate.

The figures show healthy and resilient demand for services as Americans favor spending on experiences while limiting discretionary purchases of merchandise. That dynamic helps explain a growing gulf between the two ISM surveys.

Weaker Manufacturing

The manufacturing report, out earlier this week, showed factory activity contracted at the fastest pace in more than three years. The services index is now nearly 8 points higher than the manufacturing gauge, the widest margin since August 2015.

The ISM services employment index rose to a four-month high of 53.1, indicating service providers are expanding payrolls following a contraction in the prior month.

The government’s monthly jobs report on Friday is projected to show a 225,000 gain in total US employment in June. While that would be the smallest increase since the end of 2020, it still represents a healthy pace of job growth.

Select ISM Industry Comments

“Stabilizing inflation rates are helping our overall situation.” - Agriculture, Forestry, Fishing & Hunting

“We have been very busy in June, with great content coming out of the studios and the summer guest traffic.” - Arts, Entertainment & Recreation

“General business conditions are still active and steady. We’re ramping up for a busy third quarter with some expansion and preparations for early 2024 capital projects.” - Finance & Insurance

“Inflationary pressures, staffing challenges, limited capacity and insufficient payer rates continue to financially challenge the health system.” - Health Care

“Supply chain lead times have stabilized and prices are holding or, in some cases, dropping slightly. It’s been a long time coming.” - Information

“Increased demand for new transformation programs, with prices holding and an increase in clients’ capital budget allocations.” - Professional, Scientific & Technical Services

“Business remains higher than a year ago but is falling short of forecasts and projections.” - Real Estate

“Overall business conditions are good, but growth is at a slow pace.” - Retail Trade

“Labor rates continue to be a challenge even with more people looking to return to work. Inflation is most likely a cause for this. Some incremental lower pricing on food.” - Transportation & Warehousing

“High operational expenses continue to put pressure on our business and limit hiring. Service levels from suppliers continue to improve. Trucking metrics and sales also improved.” - Wholesale Trade

The ISM measure of inventories at service providers grew at a more moderate pace following a surge in the prior month. A gauge of sentiment about inventory levels also eased but remained elevated.

--With assistance from Jordan Yadoo.

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