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.

    Tuesday’s reports added to employment and consumer spending data in suggesting sustained momentum in the economy that could bring the Federal Reserve closer to raising interest rates.

    “The economy is normal, and a normal economy requires a normal interest rate, not a zero interest rate,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

    The Institute for Supply Management’s services index rose to 58.7 last month from 56 in June. While the index only dates to 2008, an examination of subcomponents with a longer track record indicate that was the highest level of activity since December 2005. A reading above 50 indicates expansion.

    Activity in the sector, which accounts for more than 80 percent of the U.S. economy, was boosted by a jump in orders, which touched their highest point in nearly nine years.

    A sub-index gauging services industry employment also rose as did order backlogs, but export order growth moderated.

    In a separate report, the Commerce Department said orders for manufactured goods increased 1.1 percent in June, more than reversing May’s 0.6 percent decline. Orders for non-defense capital goods excluding aircraft — a measure of business confidence and spending plans — hit a record high.

    Strong business investment is one of the key ingredients needed for robust economic growth and the surge will be welcomed by Fed officials as they weigh the course of monetary policy.

    Interest rate futures now point to a better-then-even chance the U.S. central bank will hike overnight rates in June of next year. It has held them near zero since December 2008.

    “We think the Fed will revise its guidance on the outlook for interest rates at the September policy meeting, leaving the door open for a rate hike as soon as March 2015,” said John Ryding, chief economist at RDQ Economics in New York.

    The data helped lift the U.S. dollar to a 10-1/2 month high against a basket of currencies, while prices for U.S. Treasury debt fell. U.S. stocks fell as retailer Target cut its second-quarter earnings estimate.

    (SD-Agencies)