Inflation, Labor Shortage and Supply Chain Problems Weighed on Services Sector in June

Shortages of supplies and labor slowed growth in the services sector while pushing prices higher in June, a pair of business surveys revealed Tuesday.

Growth in the services sector, which accounts for over 75 percent of the U.S. economy, cooled a bit in June, separate surveys by the Institute for Supply Management and IHS Markit indicate. Despite the slowdown, growth still remains at historically high levels corresponding with the reopening of many parts of the economy and the increased willingness of consumers to “return to normal” now that mass vaccination has sent the pandemic on the retreat.

The Institute for Supply Management said its business activity index slipped to 60.1 percent from 64 percent in May. That was below the forecast for 63.3 percent.

IHS Markit said its headline index for the services sector notched down two-tenths of a point to 64.6. Economists had penciled in a rise to 65.2.

Both surveys show continued pricing pressure, high levels of demand for services, difficulties hiring new employees, and ongoing supply chain problems and shortages.

Chris Williamson, chief business economist at IHS, said that “many firms reported that business activity had been constrained either by shortages of supplies or difficulties filling vacancies. Backlogs of uncompleted orders are consequently rising at a rate unprecedented in the survey’s history, underscoring how demand is outstripping supply of both goods and services. “These capacity constraints are not only stifling grow.”

Many of the comments on the ISM survey highlighted inflation.

“Our restaurants are quickly — maybe too quickly — returning to 2019 sales levels. Strong consumer demand for dining out is clearly evident as COVID-19 restrictions ease, but the challenges are supply chain outages, logistics delays and employee- and management-staffing constraints. Some locations cannot open for business or (have) limited hours, as we cannot staff the restaurant to meet consumer demand,” an executive in the accommodations and restaurants subsector said.

“Labor market remains tight, and wages have risen at an unprecedented rate. We are expecting a long-term effect on pricing of services,” a transportation and warehouses executive said.

“These capacity constraints are not only stifling growth, but also driving prices sharply higher. June saw the second-steepest rise in average prices charged for goods and services in the survey’s 12-year history, though some encouragement can be gleaned from the rate of inflation easing in the service sector compared to May,” Williamson said.

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