The Institute for Supply Management said Wednesday its service sector index was 51.7 in May, following a better-than-expected reading of 52 for April. Economists had been expecting a reading of 50.3 in May.

A reading above 50 indicates the sector is growing, while a reading below 50 indicates contraction.

The sector's performance may provide some hope that the current U.S. economic slowdown will not be too severe.

However, the prices paid index rose to 77.0 in May, the second-highest reading in the report's 11-year history. It was up from 72.1 in April.

In other reports Wednesday:

• Worker productivity increased at a faster pace in the first three months of this year than previously estimated, while wage pressure was unchanged from their first estimate.

The Labor Department reported that productivity rose at an annual rate of 2.6% in the January-March period, faster than the government's initial estimate of 2.2% made a month ago.

The 2.6% rate of growth in productivity was a significant improvement from a 1.8% increase in the final three months of last year.

Wage pressures moderated from the final three months of last year with unit labor costs rising at an annual rate of 2.2%. That was a marked slowdown from a 4.7% surge in labor costs in the final three months of last year.

• U.S. private-sector employers added 40,000 jobs in May, which defied Wall Street's expectations of a fall.

The ADP Employer Services data release comes ahead of the government's monthly jobs report due on Friday, one of the biggest events on the monthly economic calendar. A Reuters poll shows analysts expect that to show non-farm payrolls fell by 58,000 in May.

"ADP has been inaccurate of late, overpredicting payrolls," said Cary Leahey, economist and managing director at Decision Economics in New York.

"That said, the increase of 40,000 jobs in the report will let the market conclude that the May payroll figure due this Friday will be flattish to slightly down, which would be stronger than expected and that explains this mild sell-off in the bond market."

While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs. However, if productivity is increasing, it allows businesses to finance higher wages out of the increased output.

Worker hours shrank 1.8% as businesses cut back on labor inputs to shield profits amid a cooling U.S. economy. It was the third straight quarterly decline in hours.

The Federal Reserve has started to worry more about inflation pressures in the face of a relentless surge in energy and food costs. The Fed cut rates for a seventh time on April 30, but the reduction was a smaller quarter-point move. The central bank indicated the rate cuts could be drawing to a close as the attention shifted from worrying about keeping the country out of a steep recession to concerns about inflation.

Fed Chairman Ben Bernanke discussed his inflation concerns in a speech on Tuesday, worrying that a rapid rise in prices, if sustained, "might lead the public to expect higher long-term inflation rates, an expectation that ultimately could become self-confirming."

Bernanke's remarks were seen as a strong signal that the Fed is through cutting interest rates and may start raising rates later this year as a way to battle inflation pressures.

The Fed wants to make sure that soaring energy costs don't produce higher wage pressures that could trigger a disastrous wage-price spiral like the country experienced in the 1970s.

Contributing: Reuters

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