Services sector activity slowed in May with the rate of growth down on the 16-month high recorded in April, according to the NCB Purchasing Managers' Service Index.

But growth in the sector remained strong, with 31.6 per cent of the firms surveyed reporting higher business activity than in the previous month and 50.5 per cent reporting the same level of activity.

The seasonally adjusted index recorded a level of 56.3 for May, with growth driven by expansion of new businesses during the month. The May index compared with a level of 60.8 for April and 59.0 for March, and matched the January 2002 level.

But the data on demand for services remained strongly positive, well above the critical 50 level, though the rate of expansion eased from the previous month against a background of weak capital expenditure, according to NCB.

The firms surveyed remained strongly optimistic for the year ahead, although slightly less confident than in the previous month. Their view was that recovery would not necessarily be smooth and swift.

"Growth in the services sector remained strong in May and, while activity growth eased from the April high, confidence remains very high," said Mr Eunan King, senior economist at NCB Stockbrokers.

"The continued growth in the backlog of business outstanding is beginnings to be reflected in employment growth, though increases in productivity are sought as costs continue to grow strongly relative to charges."

Employment rose at the fastest level since July 2001 with the May Index at a record 52.2 from 51.5 for April, showing expansion of the overall services workforce for the fourth successive month. Growth in staffing levels was reported across the services economy with the exception of the TMT sector.

Average charges levied by the services sector continued to rise in May but the rate of price inflation was comparatively low, although average input prices showed the sharpest rise since June 2001.