"We are encouraged by the widespread strengthening in demand evident in this survey," said Paul Dales, an economist at Capital Economics.
Americans are traveling more this summer, boosting the tourism industry, said Anthony Nieves, chairman of the ISM's survey committee. Construction firms are benefiting from growing demand for renovation and remodeling work, he added.
A measure of overall sales soared to its highest level in more than three years, the ISM said, and a gauge of new orders jumped to its highest reading in nearly eight years.
Faster growth in services should help accelerate growth and hiring. Manufacturing is already growing at a robust pace, while many service industries have lagged. Manufacturing expanded at the fastest pace in nearly three years in July, according to a separate ISM report released Friday. And factories added 28,000 jobs that month, the most in eight months, driven mostly by healthy gains at auto plants.
Yet while Americans are willing to splurge on autos, furniture and other large goods, they have been more frugal when it comes to services such as dining out, financial services and health care. Spending on big-ticket goods jumped 14 percent in the April-June quarter, according to government data. But spending on services rose just 0.7 percent.
That may have held back hiring in July. Services companies added just 140,000 jobs last month, down from an average of 220,000 in the previous three months. But Tuesday's report, which showed that services firms are hiring at the fastest pace in six months, suggests that could turn around soon.
Overall hiring has picked up strongly this year, which will give more Americans paychecks to spend and likely boost spending on both goods and services.
U.S. employers have added an average of 244,000 jobs a month in the past six months, the healthiest 6-month hiring spree in eight years.