Business activity in the US service sector stayed in positive territory in February after showing an earlier-than-usual seasonal rebound in January as new orders continued rolling in, supply deliveries improved and employment rose overall despite tight labor conditions, according to the latest survey by the Institute for Supply Management (ISM) released Friday.

The main index, which shows the directional change of economic activity, was little changed at 55.1 in February after surging 6.0 points to 55.2 in January and plunging 6.3 points to 49.2 in December, which was the first contraction since May 2020, when it registered 45.4.

The index came in stronger than the median economist forecast of 54.5. It is well above the recent low of 41.7 hit in April 2020, and 40.1 in March 2009, which is the lowest since the inception of the Services PMI in 2008. But t also remains well below the record high of 68.4 reached in November 2021.

"We still have to see how things ramp up or decline going into the spring but right now it looks like we are on this path of steady incremental growth in the service sector," Anthony Nieves, chair of the ISM Services Business Survey Committee, told reporters.

Asked about the possible negative impact of further tightening by the Federal Reserve on consumer spending and firms' financing costs, he replied,"It's not reflected in the strength of numbers that we are seeing right now."

Of the four sub-indexes that directly factor into the services PMI, business activity showed slower growth, new orders increased at a faster pace after bouncing back sharply in January, employment indicated growth after being nearly flat and supply deliveries were faster after being neutral.

The business activity index stood at 56.3, a 4.1-percentage point decrease compared to the reading of 60.4 percent in January, when it jumped 6.9 points.

The new orders index expanded in February for the second consecutive month after contracting in December for the first time since May 2020. It rose 2.2 points to 62.6 after surging 15.2 to 60.4 in January.

"Business Survey Committee respondents indicated that they are mostly positive about business conditions," Nieves said in a statement."Suppliers continue to improve their capacity and logistics, as evidenced by faster deliveries. The employment picture has improved for some industries, despite the tight labor market. Several industries reported continued downsizing."

The supplier deliveries index -- the only ISM index that is inversed -- registered 47.6 in February, indicating the fastest delivery performance since June 2009, when the index was at 46. The February reading is 2.4 points lower than the 50 in January. A reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.

The employment index rose 4.0 points to 54.0 in February from 50 in January, when it rose 0.6 from 49.4 in December. The information technology industry is among those shedding workers but some others are still trying to backfill positions.

Inflationary pressures are easing as fuel prices for trucking have come down but overall price growth is still strong. The prices Index fell 2.2 percentage points to 65.6 in February after slipping 0.3 point to 67.8 in January. The index is well below its record high of 83.2 hit in April and February 2022.

The February survey showed that firms are"becoming more cost conscious" and while higher prices an impediment somewhat, it is not stalling business activity, Nieves said.

The inventories Index grew in February after contracting for eight consecutive months; the reading of 50.6 is up 1.4 percentage points from January's figure of 49.2 percent. The inventory sentiment index at 55.3 percent, down 0.5 point from January's 55.8, expanded for the third straight month after four straight months in contraction, indicating it is"too high."

After a much stronger-than-expected 55.2 in January, the ISM services index in February is expected to slow to 54.5.

Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.