U.S. services activity inches forward; trade deficit jumps to record high

WASHINGTON (Reuters) – U.S. services industry activity nudged up in September, but growth is being restrained by a persistent shortage of inputs and the resulting high prices as the pandemic drags on.

Shipping containers are seen at the port in Bayonne, New Jersey, U.S., August 21, 2021. REUTERS/Andrew Kelly/Files

The Institute for Supply Management (ISM) survey on Tuesday reported that “ongoing challenges with labor resources, logistics, and materials are affecting the continuity of supply.” Hopes for an easing in the supply chain bottlenecks were dashed by a resurgence in COVID-19 infections over summer, driven by the Delta variant. Ports in China and the United States are also experiencing congestion.

“Supply chain bottlenecks continue to plague most businesses, causing raw materials shortages, logistics issues, higher input prices and labor shortages,” said Will Compernolle, a senior economist at FHN Financial in New York. “Services companies still have some distance before capacity meets consumer demand, let alone restock inventories.”

The ISM’s non-manufacturing activity index edged up to a reading of 61.9 last month from 61.7 in August. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index falling to 60.

Seventeen services industries, including retail trade, construction, public administration as well as finance and insurance reported growth. Only agriculture, forestry, fishing and hunting saw a decline in activity.

Accommodation and food services businesses reported increased transportation bottlenecks, which were “resulting in longer lead times and missed appointments.” Transportation and warehousing businesses said “demand far outweighs supply for goods and services.”

In the public administration industry, businesses complained about rising costs for both supply and service inputs, which they said “have the potential to significantly impact our operations through the end of the year, especially if seasonal trends prove exceptionally strong.”

The summer wave of infections has delayed an anticipated upswing in demand for services like travel and other high-contact activities. Spending is shifting from goods to services as the economy normalizes after being severely disrupted by the pandemic, thanks to vaccinations against the coronavirus.

The survey’s measure of new orders received by services businesses inched up to 63.5 last month from a reading of 63.2 in August. Its gauge of supplier deliveries dipped to a reading of 68.8 last month from 69.6 in August. A reading above 50 indicates slower deliveries. With supply still tight, prices remained high. A measure of prices paid by services industries rose to 77.5 from a reading of 75.4 in August.

That mirrored the findings of the ISM’s manufacturing survey published last Friday and suggested that high inflation could persist through the end of the year. The Federal Reserve last month raised its projection for its key inflation measure to 3.7% this year. That was up from the 3.0% projected in June.

The personal consumption expenditures price index, excluding the volatile food and energy components, increased 3.6% year-on-year in August – well above the U.S. central bank’s flexible 2% inflation target.

Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. U.S. Treasury prices fell.


But even as the services industry continues to push ahead, there are more signs that economic growth slowed sharply in the third quarter.

A separate report from the Commerce Department on Tuesday showed the trade deficit surged 4.2% to a record $73.3 billion in August. Economists polled had forecast the trade gap widening to $70.5 billion.

The report followed on the heels of government data last Friday showing high inflation sharply cutting into consumer spending in July, with a moderate rebound in August.

The Atlanta Federal Reserve is forecasting gross domestic product growth braking to a 2.3% annualized rate in the third quarter. The economy grew at a 6.7% pace in the second quarter.

Trade has subtracted from GDP growth for four straight quarters.

Imports shot up 1.4% to a record high $287.0 billion, led by consumer goods such as pharmaceutical preparations, toys, games and sporting goods. There was also a rise in imports of industrial supplies and materials.

But a global shortage of semiconductors which is hampering production at auto plants resulted in imports of motor vehicles, parts and engines decreasing $1.5 billion. The rise in imports, mostly the result of businesses rebuilding depleted inventories, suggests an apparent slowdown in consumer spending in the third quarter was probably temporary.

Exports gained 0.5% to $213.7 billion in August, the highest since May 2019, lifted by industrial supplies and materials such as nonmonetary gold and natural gas. But motor vehicles exports fell as did capital goods like civilian aircraft and industrial machinery.

Persistent shortages saw a steady build-up of unfinished work at services industries in September. Companies continued to hire more workers, though the pace slowed a bit from August. That likely reflects difficulties finding workers.

Indeed, companies complained about “employee flight to better-paying jobs and lack of a pipeline to replace.” The ISM survey also found that “labor shortages (were) experienced at all levels.”

The survey’s measure of services industry employment dipped to a reading of 53.0 last month from 53.7 in August.

The economy is experiencing an acute shortage of labor as the pandemic forced some people to drop out of work to become caregivers. Others are reluctant to return for fear of contracting the virus, while some have either retired or are seeking career changes.

There were a record 10.9 million job openings at the end of July. Economists are cautiously optimistic that the labor crunch will start easing in the fall and through winter after the expiration in September of federal government-funded unemployment benefits, which businesses and Republicans blamed for the worker shortage.

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