U.S. service sector index hits record high in October; shortages worsening – ISM survey

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WASHINGTON (Reuters) – A measure of U.S. services industry activity surged to a record high in October likely as declining COVID-19 cases boosted demand, but businesses remained burdened by snarled supply chains and the resulting exorbitant prices.

The Institute for Supply Management said on Wednesday its non-manufacturing activity index vaulted to a reading of 66.7 last month. That was the highest since the series started in 1997 and followed a 61.9 reading in September. 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 edging up to 62.0. The summer wave of coronavirus infections driven by the Delta variant has subsided, encouraging more consumption of services like air travel and dining out.

The survey’s measure of new orders received by services businesses soared to a record 69.7 last month from 63.5 in September. Spending is shifting from goods to services, thanks to vaccinations against the coronavirus.

Part of the better-than-expected services sector index reading reflected longer delivery times. The survey’s measure of supplier deliveries accelerated to a reading of 75.6 from 68.8 in September. A reading above 50 indicates slower deliveries.

A lengthening in suppliers’ delivery times is normally associated with a strong economy and increased customer demand, which would be a positive contribution to the ISM non-manufacturing index. In this instance, however, slower supplier deliveries indicate perennial pandemic-related shortages.

That was underscored by the survey’s measure of prices paid by services industries, which raced to 82.9 from a reading of 77.5 in September. Longer delivery times and higher prices mirrored the findings of the ISM’s manufacturing survey published on Monday and added to signs that high inflation was probably not as transitory as the Federal Reserve believes.

The government reported last week a record surge in wage growth in the third quarter. A report on Tuesday showed the residential rental vacancy rate fell last quarter. Wages and rents are the most sticky components of inflation.

The Fed is expected to announce on Wednesday that will start reducing the amount of money it is injecting into the economy through monthly bond purchases. Inflation is way above the U.S. central bank’s flexible 2% target.

With raw materials and labor in short supply, unfinished work at services industries continued to pile up in October. The pandemic has upended labor market dynamics, leaving employers with 10.4 million jobs to fill as of the end of August, even as millions of people are unemployed.

The ISM survey’s measure of services industry employment dropped for a third straight month, though remaining in expansion territory. At face value, that suggests national job growth remained moderate in October after employers hired the fewest workers in nine months in August.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 450,000 jobs last month after rising by 194,000 in September. The government will publish October’s employment report on Friday.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)

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