Transportation and wholesale trade were bright spots in October despite headwinds from the trade war, ISM said
Transportation and wholesale trade were bright spots in October despite headwinds from the trade war, ISM said GETTY IMAGES NORTH AMERICA / JUSTIN SULLIVAN

Activity in the US service sector jumped unexpectedly in October, a welcome sign of sustained growth in the world's largest economy in the year's final quarter, a survey showed Tuesday

The rebound in the Institute for Supply Management survey reversed the decline seen in September, when a three-year low exacerbated recession fears.

The closely watched index jumped 2.1 points to 54.7 percent, handily surpassing forecasts. Any reading above 50 indicates growth.

The increase in the index also underscored the growing divide between America's dominant service economy and its manufacturing sector, which ISM says has now been contracting for three straight months as global trade slows.

Within the report, an index for hiring also rose after a frighteningly low reading in September -- a signal that jibes with the strong October job creation reported by the federal governent.

"I think looking at this for the fourth quarter bodes well for the non-manufacturing sector," Anthony Nieves, the survey's chairman, told reporters.

The October-December period is normally strong, as companies and consumers bump up spending at the year's end, he said.

"The headwinds we have are the obvious with the trade war but there's been some progress made on that front so that's also helping the commercial, corporate psyche," he said.

The index is still well below highs seen at the end of last year.

Thirteen industries -- including agriculture, utilities, professional services, transportation and real estate -- posted growth.

Five others, such as wholesalers, retailers and mining, which includes oil producers, contracted.

"Business remains brisk and well ahead of last year to date, as we near the peak of our busiest season," a survey respondent in the real estate, rental and leasing industry told ISM.

"Looking ahead, our customers remain upbeat about their business well into next year."

Ian Shepherdson of Pantheon Macroeconomics said the improvement was welcome but did not likely point to a sustained rebound.

"Under normal conditions we'd expect the index to be in the 58-to-59 range, given the hefty increases in core retail sales in recent months," he said in a note to clients.

But given that consumer tariffs on Chinese imports remain in place, retail sales are not likely to lift the ISM services index much higher, according to Shepherdson.