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Business activity in the nation's service sector increased for the fourth month in a row in July, surpassing expectations and setting a new record, the Institute for Supply Management said Tuesday.

July's business activity index hit 65.1, beating the previous high of 63.2 established in October 1997. It reached 60.6 in June. Economists were predicting that the index would decline to 58.

The index is based on a survey of purchasing managers in industries such as finance, communications and real estate.

In the service sector, 14 industry groups grew in July, while one group contracted and two reported no change from June. Increased business activity in July was reported by 38% of members, compared with June's 41%. Reduced activity was reported by 12% of members vs. 14% in June. In July, the remaining 50% of members indicated no change in business activity, compared with 45% in June.

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The backlog of orders index rose by three points to 54.5, showing growth for the third consecutive month. The July new orders index increased from 57.5 in June to 66.9.

Last month's prices paid index was 50.6, down slightly from 51.4 in June. Eight industry groups reported paying higher prices compared with June. Four reported paying the same, and five industry groups reported paying lower prices in July.