By Lucia Mutikani
WASHINGTON (Reuters) - U.S. services sector activity hit an 8-1/2-year high last month and factory orders surged in June, bolstering expectations of solid economic growth in the third quarter.
The Institute for Supply Management said on Tuesday its services index rose to 58.7, the highest level since December 2005, from 56.0 in June, with new orders reaching their highest level since August 2005.
A reading above 50 indicates expansion in the sector.
In a separate report, the Commerce Department said orders for manufactured goods increased 1.1 percent after a 0.6 percent decline in May. Economists had forecast new orders received by factories rising only 0.6 percent.
U.S. stocks held losses after the unexpectedly better ISM and factory orders data, while the U.S. dollar extended gains against a basket of currencies. Yields on U.S. 10-year and 30-year Treasuries touched session highs after the data.
Manufacturing is expanding strongly, helping to keep the economy on solid ground. A survey last Friday showed new orders at the nation's factories surged in July.
Automobile production is also accelerating. But businesses amassed huge piles of stocks in the second quarter, which they will probably need to work through before placing more orders.
That could take some edge off factory activity and overall economic growth. The economy grew at a 4.0 percent annual pace in the April-June period, and growth estimates for the third quarter are currently around a 3 percent rate.
Orders excluding the volatile transportation category jumped 1.1 percent in June, the largest increase since July of last year, as bookings for primary metals, machinery and electrical equipment, appliances and components rose. Orders for computers and electronic products also increased.
Unfilled orders at factories rose 1.0 percent. Order backlogs have increased in 14 of the last 15 months.
The Commerce Department also said orders for durable goods, which are manufactured products expected to last three years and more, rose a sturdy 1.7 percent in June instead of the 0.7 percent rise reported last month.
Durable goods orders excluding transportation surged 1.9 percent instead of the previously reported 0.8 percent advance.
Orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - increased 3.3 percent. The so-called core capital goods data was previously reported to have increased 1.4 percent.
The factory orders report showed inventories rose 0.3 percent in June, slowing from May's 0.8 percent gain. Shipments rose 0.5 percent after slipping 0.1 percent in May. The inventories-to-shipments ratio was unchanged at 1.31.
(This story has been filed again to fix the verb tense in sixth paragraph)
(Reporting by Lucia Mutikani; Additional reporting by Rodrigo Campos in New York; Editing by Paul Simao)