By Leah Schnurr
NEW YORK (Reuters) - The services sector expanded at its fastest pace in a year in February, helped by a gain in new orders and as the housing market shows signs of stabilizing.
The Institute for Supply Management said its services index rose to 57.3 in February last month from 56.8 in January, in sharp contrast to economists' expectations for a drop to 56.1.
It was the index's highest level since February 2011. The services sector accounts for about two-thirds of U.S. economic activity. A reading above 50 indicates expansion.
Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, highlighted the gain in the forward-looking new orders component.
"At this level of ISM, this is not really changing our view that you're still looking at around a 2.0 percent year in terms of GDP (growth), but it is holding up, and this is certainly what you want to see."
Separate data showed a decline in new orders for factory goods was not as steep as expected in January, while December's gain was revised higher.
Monday's data prompted investment bank Goldman Sachs (GS.N) to raise its outlook for first-quarter economic growth to 2.0 percent annualized from 1.9 percent.
Growth in the first three months of the year is seen backing off from the 3 percent rate in the fourth quarter of 2011, though a string of recent positive data has suggested underlying resiliency. Expectations range from 1.9 percent to 2.5 percent.
Graphic on U.S., world February PMI indexes: http://link.reuters.com/tev86s
U.S. PAYROLLS SEEN RISING
ISM's gauge of new orders improved to 61.2 from 59.4.
Real estate, rental and leasing sectors led growth, ISM said, suggesting housing got a boost from the unseasonably warmer weather.
Recent stronger data in the housing market has suggested the sector is starting to heal.
The employment index eased to 55.7 from 57.4, on the heels of the biggest jump on record in January. Economists said February's reading was still consistent with a good rise in jobs in the U.S. Labor Department's payrolls survey due Friday.
Friday's official employment report is expected to show the economy added 210,000 jobs in February, down from a rise of 243,000 in January.
The ISM prices paid index jumped to 68.4 from 63.5, suggesting that companies could start to be squeezed by higher input costs.
"The question is how quickly those higher fuel costs can be passed on to customers. Right now, suppliers are trying not to pass the higher prices on right away because there's not a lot of pricing power right now," Anthony Nieves, chair of the ISM non-manufacturing business survey committee, said in a conference call.
The report was in contrast to data from the euro zone's private sector earlier on Monday that showed Italian and Spanish businesses dragged the currency bloc back into decline last month.
It also diverged from ISM's manufacturing data released last week that showed growth in that sector cooled last month.
U.S. FACTORY ORDERS SLIP IN JANUARY
The Commerce Department said orders for manufactured goods fell 1.0 percent, not as big as the 1.5 percent drop that economists were expecting. Still, it was the biggest decline since October 2010.
December was revised up to 1.4 percent from 1.1 percent.
U.S. Treasury prices eased, but the data was eclipsed on Wall Street by China's reduction in its 2012 growth target to an eight-year low. The three major U.S. stock indexes declined, with both the Standard & Poor's Index and the Nasdaq near session lows in early afternoon trading.
Paul Dales, senior U.S. economist at Capital Economics, noted there has been a recent disparity with so-called soft survey data showing stronger growth than hard data figures.
"It is possible that the hard data are being held back by temporary factors, such as expiring personal and business tax credits. But the surveys could once again be over-egging the improvement. As is often the case, the truth probably lies somewhere in between," Dales wrote in a note.
(Reporting By Leah Schnurr, Additional reporting by Luciana Lopez and Emily Flitter in New York and Jason Lange in Washington; Editing by Jan Paschal)