July 6, 2021

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of service sector firms.

The service sector business activity index fell 5.8 points in June to 60.4 after rising 3.5 points in May.  The 69.4 reading for March was the highest for this index since data collection began in 1997. Sixteen of 18 service industries reported growth in June.  The ISM group says that its current level of 62.7 is consistent with GDP growth of 3.8%.

Anthony Nieves, Chair of the ISM’s Business Survey Committee said, “The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month’s all-time high. Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions,”

Comments from respondents include:

“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.” [Accommodation & Food Services]

“Severe supply chain disruptions and inflation are continuing in the marketplace, in all sectors.” [Arts, Entertainment & Recreation]

“COVID-19 continues to cause troubles for all of our deliveries, as well as short supply a lot of materials. (Shortages of) lumber, copper, and steel continue, which is driving up pricing and lead times.” [Construction]

“Employees globally are returning to the office where possible. We expect to have most employees in the office starting in September.” [Information]

“Business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous. We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market.” [Retail Trade]

“Labor market remains tight, and wages have risen at an unprecedented rate. We are expecting a long-term effect on pricing of services.” [Transportation & Warehousing]

Often changes in the overall nonmanufacturing index are led by changes in the orders component which is quite volatile.  In this case, orders declined 1.8 points to 62.1 afer rising 0.7 point in May.  The March level of 67.2 was an all-time high.  Sixteen of  18 industries reported growth in orders in June. Comments from respondents include: “More traffic at our locations, resulting in more service” and “Elective surgeries continuing to grow and fill the schedule.”

The ISM non-manufacturing index for employment fell 6.0 points in June to 49.3 after having fallen 3.5 points in May.  Twelve industries reported an increase in employment in June. Two industries reported a decline. Comments from respondents include: “Increasingly difficult to find qualified candidates to fill open positions” and “Employees have been somewhat slow to return to work, and there has been turnover as some pursue new opportunities in a hot job market.”

The supplier deliveries component fell 1.9 points in June to 68.5 after having risen 4.3 points in May.   This component is reversed in the sense that a reading above 50 percent indicates slower deliveries to service sector firms, while a reading below 50 percent indicates faster deliveries. Thus, firms are reporting slower deliveries in June at a somewhat slower rate than in May. Demand in the service sector is extremely strong, but firms are unable to muster a similar-sized increase in production. Comments from respondents include: “Transportation shortages (and a) lack of drivers have slowed deliveries” and “Port congestion continues to delay product deliveries.”

Finally,  the price component ell 1.1 points in June to 79.5 after having risen by 3.8 points in May.   Prices are rising at the fastest pace since July 2008. Seventeen of 18 service sector industries reported an increase in prices paid during the month.

The manufacturing and non-manufacturing sectors of the economy have skyrocketed in recent months to the highest levels in years.  We expect to see a 9.0% increase in GDP in the second quarter of this year and an 8.0% GDP growth rate for 2021.

.Stephen Slifer

NumberNomics

Charleston, SC