Service sector

US service sector picks up speed in March; high input prices persist – ISM survey

WASHINGTON (Reuters) – U.S. service-sector activity picked up in March, boosted by the rollback of pandemic-related restrictions, but businesses continued to face higher costs as tensions supply persisted.

The Institute for Supply Management said on Tuesday its non-manufacturing activity index rebounded to 58.3 last month from a one-year low of 56.5 in February. This ended three consecutive months of declines in the index and also signaled a shift in spending towards services from goods.

COVID-19 restrictions have been lifted across the country following a massive drop in coronavirus infections, triggering pent-up demand for services such as air travel and restaurants. The government announced last week that consumer spending on services rose the most in seven months in February, while spending on goods fell.

Economists polled by Reuters had expected the non-manufacturing index to rise to 58.4. A value above 50 indicates an expansion of the service sector, which accounts for more than two-thirds of US economic activity.

The ISM’s measure of new orders received by service businesses rebounded to a reading of 60.1 from a 12-month low of 56.1 in February.

Its services industry employment gauge jumped to 54.0 after falling to a year-and-a-half low of 48.5 February, which was also the sub-index’s first contraction since January 2021.

The strong demand for labor was confirmed on Friday by the March jobs report, which showed nonfarm payrolls increased by 431,000 jobs last month.

Despite increased hiring, service industries made little progress in reducing the backlog of unfinished work, indicating that shortages remained binding.

Russia’s war on Ukraine is worsening global supply constraints. Prices of commodities like oil and wheat have jumped since the invasion of Ukraine on February 24.

The ISM survey’s measure of order books at service businesses rose slightly to 64.5 last month after jumping to 64.2 in February. Its supplier deliveries gauge slipped to a still-high reading of 63.4 from 66.2 in February. A reading above 50 indicates slower deliveries.

This means that services inflation has increased. The survey’s measure of prices paid by service industries rose to 83.8 from 83.1 in February, indicating that inflation could remain uncomfortably high and prompt an aggressive response from the Federal Reserve.

The US central bank last month raised its key rate by 25 basis points, the first hike in more than three years. Policymakers have stepped up their hawkish rhetoric, with Fed Chairman Jerome Powell saying the US central bank must act “quickly” to raise rates and perhaps “more aggressively” to prevent high inflation from taking hold .

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)