Service providers see record growth

U. S. service providers expanded at a record pace in October, powered by resilient demand and stronger business activity as the impact of the delta variant faded.

The Institute for Supply Management’s services index advanced to 66.7 last month, exceeding all projections, from 61.9 in September, data showed Wednesday. Readings above 50 signal growth.

The gauges of new orders and business activity also increased to the highest in data back to 1997, indicating the economy picked up steam at the start of the fourth quarter.

Although business activity, new orders, supplier deliveries and backlog of orders all surpassed previous records, sticky issues that have plagued almost every kind of economic activity since infections began to ease in the U.S.: labor shortages, supply chain bottlenecks and higher prices.

“The broad picture painted by this report is that the economy is overheating,” said Stephen Stanley, chief economist for Amherst Pierpont Securities. “Demand is overwhelmingly strong at the same time that supply is constrained. Still, I am not sure that even a fully-functioning supply side, with more labor and a resolution of snags would be able to handle the pace of demand right now.”

Steadfast household and business demand also suggests little respite for still-stressed supply chains that are contributing to higher inflation.

“Demand shows no signs of slowing,” Anthony Nieves, chairman of the institute’s services business survey committee, said in a statement. “However, ongoing challenges — including supply chain disruptions and shortages of labor and materials — are constraining capacity and impacting overall business conditions.”

The institute’s measure of prices paid by service providers for materials and services increased to the highest level since September 2005. An index of supplier delivery times climbed to the second highest on record, indicating

extended delays and lingering capacity constraints.

Nieves said on a call with reporters that companies are also pulling forward orders because of “the supply chain disruption and the longer lead time.”

All 18 services industries reported growth last month, led by retail trade, transportation and warehousing, and real estate.

Meantime, a decline in the group’s measure of employment shows labor market challenges persist. The index slipped to a four-month low of 51.6 in October, indicating more moderate job growth even as demand remained buoyant.

Separate figures earlier from ADP Research Institute showed private industry payrolls climbed a larger-than-projected 571,000 in October, though the level of employment remains well below pre-pandemic levels.

The labor shortages, along with the difficulties in getting parts and products due to supply chain issues, led to a record reading of 67.3 in the backlog of orders category.

The same factors are depleting stockpiles. A gauge of inventories dropped to its lowest point since March of last year. What’s more, the institute’s inventory sentiment gauge dropped to the second lowest on record, suggesting respondents view their existing supplies and materials as too lean.

The report, which covers the industries that make up almost 90% of the economy, follows data out on Monday that showed manufacturers continue to struggle with many of the same supply constraints as service providers.