The Institute for Supply Management, a private trade group, said Thursday its index of service sector activity rose to 59.4 last month. That was up sharply from December's reading of 57.1. It was the 14th straight month of growth and the highest reading since August 2005.
Any reading above 50 indicates expansion.
The economy's service sector includes everything from retailers and hotels to health care companies and financial services. Service industries are benefiting from a more confident consumer spending more freely.
Manufacturing and the service sectors are now growing at pre-recession rates, and economists expect that will translate into more hiring in the months ahead.
The government is set to issue its January employment report Friday. Economists are predicting a net gain of 146,000 jobs last month, though some suggest it could be higher based on the latest economic data.
"Growth and employment have picked up in January," said John Ryding, an economist at RDQ Economics. "The economy is on a more robust growth path in early 2011."
Also Thursday, retailers reported solid January sales gains, defying fears that snowstorms would inhibit shopping. Costco Wholesale Corp, Victoria's Secret parent Limited Brands and Macy's Inc. all posted increases that beat Wall Street expectations.
And U.S. factory orders rose in December, the Commerce Department said. Orders were pushed up by demand from businesses for machinery and communications equipment. Orders have now risen in five of the past six months.
Earlier this week, the ISM trade group said factory activity in January expanded at the fastest pace in nearly seven years.
Another positive sign: Fewer people applied for unemployment benefits, reversing a spike from the previous week largely caused by harsh winter weather.
Applications fell to 415,000, the Labor Department said. That resumes a downward trend that took shape late last year and gave rise to hopes that employers would step up hiring.
Applications are well below their peak of 651,000, reached in March 2009, when the economy was deep in recession. Fewer than 425,000 people applying for benefits is consistent with modest job growth. But applications would need to fall consistently below 375,000 to signal a likely decline in the unemployment rate.
In a separate report, Labor said productivity - the level of output per hour worked - rose 2.6 percent in the final three months of last year. That's slightly higher than the previous quarter. Still, the trend in productivity growth has been declining. That indicates employers may need to step up hiring soon if they want to expand.
The report on the service industry bolstered the notion that companies may be ready to add workers. The services employment index rose to 54.5, the highest since May 2006. The employment indexes in the manufacturing and service sector indexes both rose in January.
Employers will likely create a net 2.2 million jobs this year, according to a survey of economists taken last month by The Associated Press. That's double the number of jobs generated in 2010.
Consumers are forecast to spend a little more freely, boosting economic growth to about 3.2 percent in 2011 from 2.9 percent in 2010. But the economy would need to grow much faster - closer to 5 percent for a year - to substantially reduce unemployment.
Analysts project that the unemployment rate will fall to 8.9 percent by the end of this year, according to the AP Economy Survey.
AP Writers Martin Crutsinger and Anne D'Innocenzio contributed to this report.