WASHINGTON (Reuters) -The U.S. services sector accelerated to a more than two-year high in October as employment rebounded strongly, suggesting that a near stall in job growth last month was an aberration.

The surprise strength in the vast services sector reported by the Institute for Supply Management (ISM) on Tuesday indicated that the economy retained most of its momentum early in the fourth quarter and was in solid shape as Americans headed to the polls to pick the next president.

Republican presidential candidate Donald Trump is locked in a tight race for the White House with Democratic Vice President Kamala Harris. Comments from respondents in the ISM were generally upbeat and included, "business is booming, nothing slowing down," and "commodity pricing is stabilizing as inflation concerns ease."

"This sets the stage for another quarter of solid economic growth to round out 2024 to further push off concerns about the state of the economy," said Ben Ayers, senior economist at Nationwide.

The ISM's nonmanufacturing purchasing managers (PMI) index jumped to 56.0 last month, the highest reading since July 2022, from 54.9 in September. Economists polled by Reuters had forecast the services PMI declining to 53.8.

A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM views PMI readings above 49 over time as generally indicating an expansion of the overall economy.

Fourteen services industries reported growth, including retail trade, information, transportation and warehousing as well as construction, mining, and finance and insurance. Other services, and management of companies and support services, were the only two categories reporting a contraction.

Construction companies used the words "good" and "building backlog" to describe business. Professional, scientific and technical services firms said "business is in a steady state, with everyone holding an even keel awaiting U.S. election results."

But some healthcare and social assistance companies reported that Hurricane Helene, which devastated large parts of the Southeast, had "seriously damaged an IV production plant in North Carolina" and they were "now starting to experience shortages." Wholesale traders said "the economy is still causing issues within our business and that of our suppliers."

The survey's measure of employment rebounded to 53.0 in October, the highest reading since September 2023, from 48.1 the prior month.

It reinforced economists' views that October's paltry 12,000 gain in nonfarm payrolls was the result of temporary factors like Hurricanes Helene and Milton as well as strikes by aerospace workers, including at Boeing.

The strikers accepted a new contract offer from Boeing on Monday, ending a bitter seven-week work-stoppage that halted most jet production and worsened a financial crisis at the troubled planemaker.

"While businesses may not be hiring as many workers as they were coming out of the pandemic, there is still little evidence that businesses are rapidly shedding workers either," said Shannon Grein, an economist at Wells Fargo.

The ISM's new orders measure eased to a still-high 57.4 last month from 59.4 in September. Its prices paid gauge for services inputs ticked down to 58.1 from 59.4 in September, indicating that inflation pressures continued to abate.

The Federal Reserve is on Thursday expected to cut interest rates again, this time by a quarter of a percentage point to the 4.50%-4.75% range. The U.S. central bank launched its policy easing cycle with an unusually large half-percentage-point rate cut in September, the first reduction in borrowing costs since 2020. The Fed hiked rates by 525 basis points in 2022 and 2023.

Stocks on Wall Street were higher. The dollar slipped against a basket of currencies. U.S. Treasury yield rose.

TRADE DEFICIT WIDENS

Strong domestic demand, which is underpinning the economy, is drawing in imports. The threat of higher tariffs on goods if Trump is returned to the White has also prompted businesses to front load on imports, driving the trade deficit to a nearly 2-1/2-year high in September.

Trump has promised to impose a 60% tariff on Chinese goods and at least a 10% levy on all other imports if he wins Tuesday's election.

The trade gap increased 19.2% to $84.4 billion, the highest level since April 2022, the Commerce Department's Bureau of Economic Analysis said in a separate report. Economists had forecast the trade deficit would swell to $84.1 billion.

Imports jumped 3.0% to a record $352.3 billion. Goods imports advanced 4.0% to $285.0 billion, the highest level since March 2022. They were driven by a $4.0 billion rise in imports of consumer goods, mostly pharmaceutical preparations.

Capital goods imports increased $2.8 billion to an all-time high, lifted by computers and semiconductors. Imports of industrial supplies and materials, which include crude oil, rose $2.2 billion. Imports of automotive vehicles, parts and engines gained $1.2 billion. 

Food imports at $18.8 billion were the highest on record. But imports of services fell $0.6 billion to $67.3 billion, amid a $0.8 billion decline in charges for the use of intellectual property. Travel services imports fell $0.2 billion, but those of transport services rose $0.3 billion.

Exports dropped 1.2% to $267.9 billion. Goods exports fell 1.8% to $176.0 billion, weighed down by a decline of $1.9 billion in capital goods, mostly civilian aircraft. Consumer goods exports fell $1.4 billion amid a drop in pharmaceutical preparations. Exports of industrial supplies and materials decreased $1.4 billion, with crude oil easing $1.3 billion.

Exports of services slipped $0.1 billion to $91.9 billion, reflecting a $0.2 billion dip in maintenance and repair services. Government goods and services increased $0.1 billion while transport services edged up $0.1 billion. 

The goods trade deficit widened 14.9% to $109.0 billion, also the highest since March 2022. It increased 13.1% to $100.1 billion when adjusted for inflation.

The goods trade deficit with China widened to $26.9 billion from $24.7 billion in August.

Trade subtracted 0.56 percentage point from gross domestic product in the third quarter. It has been a drag on economic growth for three straight quarters. The economy grew at a 2.8% annualized rate in the July-September quarter.

"We expect imports to outpace exports in the short term, as investment in data centers and semiconductors supports capital goods imports and a strong consumer pushes retailers to build out inventories," said Matthew Martin, a senior U.S. economist at Oxford Economics.