That January reading was above analysts' expectations of 39, according to a survey by Thomson Reuters. Any reading above 50 signals growth, while a reading below 50 indicates contraction.
The ISM's service sector index is based on a survey of member companies in 18 industries such as hotels and travel, retail, health care and mining.
While the report indicates that the economy's decline may be moderating, it does not necessarily signal a turnaround, economists said.
"There is no reason at all to expect any sustained improvement in sentiment anywhere in the economy at this point," Ian Shepherdson, chief economist at High Frequency Economics, wrote in a research note.
The report said new orders and production declined, but also at a slower pace than the previous two months.
Only two industries reported growth in January - health care and social assistance, and finance and insurance - despite recent troubles in the banking industry.
The 16 industries that reported declining activity include: mining, retail trade, accommodation and food services, transportation and warehousing, and real estate, rental and leasing.
The survey's employment index also continued to weaken, dropping to 34.4 in January from 34.5 the previous month. Only one industry - transportation and warehousing - reported an increase in hiring, while the rest reported a drop or no change.
Some respondents said they had instituted hiring freezes due to the slowing economy, the ISM said.
The retail industry suffered through a particularly tough January.
Luxury retailer Neiman Marcus Group Inc. on Tuesday said its same-store sales tumbled 24.4 percent last month. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones.
Macy's Inc. on Monday said it will eliminate 7,000 jobs, almost 4 percent of its work force, and cut capital spending, reduce its contributions to its employees' retirement funds and slash its dividend to preserve cash. The Cincinnati-based department store chain also delivered downbeat earnings and sales forecasts for the year.
Morey money-related links:
CLICK HERE to follow Action News on Twitter
CLICK HERE to get Action News on your website
CLICK HERE to find Action News on Facebook
