U.S. services sector index races to record high in July -ISM survey

By Lucia Mutikani

WASHINGTON (Reuters) - A measure of U.S. services industry activity jumped to a record high in July, boosted by the shift in spending to services from goods, but businesses continued to face rising prices because of supply chain constraints.

The Institute for Supply Management said on Wednesday its non-manufacturing activity index raced to 64.1 last month, the highest reading in the series' history, from 60.1 in June.

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 climbing to 60.5.

Demand is rotating back to services as nearly half of the population has been fully vaccinated against COVID-19, allowing people to travel, frequent restaurants, visit casinos and attend sporting events among services-related activities that were curbed early in the pandemic in favor of goods.

Government data last week showed spending on services accelerated sharply in the second quarter, helping to lift the level of gross domestic product above its peak in the fourth quarter of 2019.

The ISM survey's measure of new orders received by services businesses increased to a reading of 63.7 from 62.1 in June. Further gains are likely in the months ahead, with inventories lean and inventory sentiment among customers poor. Businesses depleted inventories at a rapid clip in the second quarter. Stocks at retailers are well below normal levels.

The strong demand is continuing to strain supply chains. The survey's measure of supplier deliveries rose to 72.0 from a reading of 68.5 in June. A reading above 50 indicates slower deliveries. With bottlenecks in the supply chain persisting, input prices are soaring for services businesses.

That contrasts with signs of an easing in supply and price pressures reported in the ISM's manufacturing survey on Monday.

RISING PRICES

Last month, a measure of prices paid by services industries surged to 82.3, the highest reading in nearly 16 years, from 79.5 in June.

Some economists worry that higher inflation could be more persistent than currently envisioned by the Federal Reserve.

Fed Chair Jerome Powell has repeatedly stated that inflation will moderate as supply constraints abate. The U.S. central bank's preferred inflation measure, the personal consumption expenditures price index, excluding the volatile food and energy components, shot up 3.5% year-on-year in June, the largest gain since December 1991.

Services industries hired more workers in July. A measure of services industry employment rebounded to a reading of 53.8 from 49.3 in June.

That together with a pick-up in hiring at factories bodes well for July's employment report, due to be released on Friday.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 880,000 jobs last month after rising by 850,000 in June. Employers are struggling to find willing workers to fill a record 9.2 million job openings even as 9.5 million people are officially unemployed.

Lack of affordable child care and fears of contracting the coronavirus have been blamed for keeping workers, mostly women, at home. There have also been pandemic-related retirements as well as career changes. Republicans and business groups have blamed enhanced unemployment benefits, including a $300 weekly check from the federal government, for the labor crunch.

While more than 20 states led by Republican governors have ended these federal benefits before they were scheduled to run out in early September, there has been little evidence that the terminations boosted hiring.

The labor shortage is expected to ease in the fall when schools reopen for in-person learning, but a resurgence in new COVID-19 cases, driven by the Delta variant of the coronavirus, could see some people reluctant to return to the labor force.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)

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