NEW YORK (CNN/Money) - A measure of U.S. service-sector activity rose to its highest level on record in July, the nation's purchasing managers said Tuesday.

The Institute for Supply Management's index of non-manufacturing business activity jumped to 65.1 from a revised 60.6 in June, the ISM said, the highest level since the group's survey began in July 1997.

The ISM's "new orders" index jumped to 66.9 from 57.5 in June. The "backlog of orders" index rose to 54.5 from 54.1.

More generally, the ISM said survey respondents expressed more optimism than in the first half of 2003.

U.S. stock market prices were briefly heartened by the news and erased their early losses, but headed south again quickly. Treasury bond prices continued to fall.

There were some worrisome aspects of the report. The employment index posted a small gain, to 50.7 from 50.3, indicating employers were still hiring, but the pace of their hiring wasn't rising nearly as quickly as the pace of their business activity.

The same trend is seen in the broader economy; businesses are squeezing more and more production and profits out of fewer and fewer workers.

The economy has been climbing out of recession since November 2001, according to the National Bureau of Economic Research, but job cuts have continued, leading to the longest job-market slump since World War II.

And, despite the robust activity, the "prices" index of the ISM report dropped to 50.6 from 51.4, a sign that strong economic growth won't necessarily lead to a pickup in inflation any time soon.