The U.S. service sector’s rapid expansion cooled in July, though most industries indicated business remains solid.
An index of nonmanufacturing activity—reflecting industries such as hair-cutting and accounting—fell to 55.7 in last month from 59.1 in June, the industry group Institute for Supply Management said Friday. That marked the lowest level in almost a year. Any reading above 50 indicates rising activity, as determined by factors such as production, sales and prices.
Economists surveyed by The Wall Street Journal had expected a reading of 58.5.
Service industries make up most of the economy. The report suggests the sector remains healthy and growing—sales, production and exports all continued to rise as they have been in recent years. But growth in each slowed last month.
Businesses struggled to meet demand for their services in part because they are having trouble finding workers, said Anthony Nieves, head of the ISM survey. Unemployment, at 3.9% in July, is near the lowest level in years. He also pointed to worries about trade disputes between the U.S. and other countries, including China, that might be affecting business plans.
Mr. Nieves said activity had risen so quickly earlier this summer that the economy was at risk of overheating. In July, the sector reverted back to the trend of recent years, which he said reflected more balanced, steady growth. Economic output in the U.S. grew at a 4.1% rate in the second quarter, the fastest in nearly four years, and many private-sector economists are calling for 3% growth in the current quarter.
“This helps us with a little bit of cooling off right now,” Mr. Nieves said, adding: “It’s better than the economy overheating.”
Comments from companies in the survey suggested they remain upbeat.
“Current local and national conditions are good,” one executive from the finance and insurance industry said in the survey. “On track to meet goals and projections for 2018.”
The report showed companies stepped up hiring to meet demand. An index of hiring across service industries picked up, rising to 56.1 in July from 53.6 in June.
Meanwhile, inflation pressures rose. An index of prices for materials and services climbed to 63.4 in July from 60.7 a month earlier.
Write to Josh Mitchell at joshua.mitchell@wsj.com
