The index is a survey of a wide variety of businesses; the sector employs 90 percent of all workers, including those employed at restaurants, hotels and retailers.
A measure of new orders rose to 59.3 from 58.1, the highest level since February.
Hiring rose sharply, up 6 points to 56.3, though Friday's jobs report showed the smallest number of jobs were created in the sector since June.
A separate report from Gallup showed strengthening consumer spending last month, which could spur more hiring.
Consumers spent an average of $83 per day in stores, online and in restaurants in December, which is not only the most since December 2008, but the first time the figure has eclipsed $80 since the recession, Gallup said in a Friday report.
Somewhat surprisingly, tense "fiscal cliff" negotiations didn't weigh too heavily on hiring at the end of the year, though economists argue that clearing off additional budgetary concerns such as the debt limit would free up the economy to grow at a much faster rate.
Congress and the White House reached a deal this week to avoid most tax increases but will have to face another round of serious issues during the next couple of months.