The services sector expanded more rapidly than economists expected in July, according to data released Wednesday by the Institute for Supply Management.

The institute’s non-manufacturing business activity composite index increased to 54.3 on a seasonally adjusted basis, from 53.8 in June. Economists polled by Thomson Reuters had expected a 53.0 July level. Readings below 50 signal a slowing economy, while those above 50 suggest expansion.

The index’s prices paid component, closely watched for signs of inflation, slid to 52.7 from 53.8. The employment component rose to 50.9 from 49.7.

The business activity/production index fell to 57.4 in July from 58.1 in June; the new orders index was at 56.7, up from 54.4; backlog of orders slipped to 52.0 from 55.5; new export orders increased to 52.0 from 48.0; inventories decreased to 55.5, down from 58.5; inventory sentiment remained at 59.0; the supplier deliveries index fell to 52.0 from 53.0; and imports were unchanged at 48.0.

Ellen Beeson Zentner, a senior economist with the Bank of Tokyo-Mitsubishi, said the gain in the services employment component bodes well for Friday’s monthly payroll report.

“The improvement in the index, which represents about 60% of U.S. economic activity, is encouraging as it comes at a time when the U.S. economic outlook has been called into question,” Beeson Zentner said Wednesday. “Rumblings of a double-dip recession have been growing, though it is uncertain at this time that we are in for anything more than a slowdown in the second half of 2010.”

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