(Bloomberg) -- The US service sector expanded in January at the fastest pace in four months after coming close to stagnating at the end of 2023, helped by a pickup in orders and employment.

The Institute for Supply Management’s overall gauge of services increased 2.9 points, the biggest gain in a year, to 53.4 last month. The index has remained above the 50 level that indicates expansion for a year. The latest reading exceeded all estimates in a Bloomberg survey of economists.

The group’s metric of prices paid for materials jumped 7.3 points, the most since 2012, to 64 in January. The index is the highest since February of last year and shows that costs are rising at a faster pace, according to the data released Monday.

The surge in prices is being driven by higher shipping costs and across-the-board increases in commodities and services prices, the ISM’s Anthony Nieves told reporters on a call. US companies are contending with soaring ocean shipping costs amid militant attacks in the Red Sea that are prompting carriers to reroute.

The S&P 500 extended declines and Treasury yields rose after the report.

“Once again, the US economy continues to exceed the relatively gloomy projections of Street economists and financial market participants,” Stephen Stanley, chief US economist at Santander US Capital Markets LLC, said in a note.

A gauge of new orders placed with service providers — a proxy of future demand — rose to a three-month high of 55. Last week, manufacturing data from the ISM showed an increase in the bookings measure that helped push its overall index of factory activity closer to expansion territory.

The business activity index, which parallels ISM’s factory output gauge, held at a robust reading of 55.8.

“The majority of respondents indicate that business is steady,” Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “They are optimistic about the economy due to the potential impact of interest rate cuts; however, they are cautious due to inflation, associated cost pressures and ongoing geopolitical conflicts.”

Ten service industries reported growth in January, led by health care, agriculture and professional, scientific and technical services, while seven contracted.

Select ISM Industry Comment

“Transportation impacts of the Suez Canal, due to unrest in the Red Sea and the issues at the Panama Canal are impacting both costs and schedules for the transport of global goods.” - Construction

“Economy signals are mixed. Some sectors are booming and some — like solar and wind power, ship building and electric vehicles — are slowing down. Other downward-trending sectors are iron and steel, paper and communication equipment. But overall, the economy is in good shape and there is no imminent threat of a recession.” - Retail Trade

“Economic indicators generally look good; however, there is still some uncertainty.” - Transportation Equipment

“Most companies I work with are gearing up for a tough 2024. Some may be overreacting, but there is a general sense that election years in the U.S. result in unrest, which is causing everyone to be conservative with spend.” - Professional, Scientific & Technical Services

“(Looking to rebound) after a significant downturn in December, which was likely due to extended plant shutdowns, customer inventory burns and lingering effects from the United Auto Workers strike.” - Wholesale Trade

The group’s measure of services employment rebounded 6.7 points, back to expansion territory at 50.5. The government’s monthly jobs report on Friday showed total payrolls growth far exceeded estimates, illustrating a resilient labor market that is seen delaying any interest-rate cuts by the Federal Reserve.

The services report showed 35.5% of industries reported paying higher prices for materials, the largest share in a year. The figures suggest that while the US inflation rate is slowing, the threat of lingering price pressures remains a risk.

Meantime, the services report showed stronger export growth and higher backlogs. A measure of sentiment about inventory levels rose, indicating respondents see their stockpiles as too high relative to demand.

--With assistance from Kristy Scheuble.

(Adds market reaction, comment from ISM’s Nieves and economist’s comment)

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