NEW YORK (CNN/Money) - Activity in the U.S. service sector heated up in May, the nation's purchasing managers said Wednesday, beating analysts' expectations.

The Institute for Supply Management's reading of non-manufacturing activity came in at 54.5, compared with 50.7 in April. Any reading above 50.0 indicates growth in the sector. Economists, on average, expected a reading of 52, according to a Reuters poll.

The news helped lift U.S. stock prices in early trading, while Treasury bond prices also rose.

The ISM's "new orders" index jumped to 54.7 from 50.6, but its employment index rose only to 48.7 from 48.2 -- indicating businesses were still laying workers off, though at a slower pace.

The service sector is the economy's biggest employer, and service activity -- including banking, tourism, entertainment and more -- makes up about 80 percent of the total economy.

On Tuesday, Chicago outplacement firm Challenger Gray & Christmas said layoff announcements in May fell to their lowest level in 30 months, raising hopes the long-suffering labor market was nearing a recovery.

The Labor Department is scheduled to report May unemployment and payroll figures Friday. Economists, on average, expect the unemployment rate to rise to 6.1 percent -- the highest since July 1994 -- and for 39,000 jobs to be shed from payrolls, according to a Reuters poll.

On Monday, the ISM said its manufacturing index, which is more closely watched than the non-manufacturing index, was also stronger than expected in May. Though that index showed continued contraction in the factory sector, Wall Street took the surprisingly strong performance as a sign the economy was on the upswing.

Despite such encouraging signs, Federal Reserve Chairman Alan Greenspan indicated Tuesday he wasn't entirely convinced a recovery was under way, and said central bank policy makers were still on the lookout for deflation, an unstoppable drop in prices that cripples corporate profits and cools economic activity.

In one sign that inflation was a distant memory for the economy, the ISM's "prices paid" index for service activity dropped to 49.6 from 56.7. Some of those declines were likely due to a drop in oil prices following the U.S.-led war with Iraq.