Strong U.S. service sector, private payroll boosts economy


A measure of service sector activity in the United States hit an all-time high in October, likely as declining Covid-19 cases boosted demand, but companies remained burdened by supply chains booming and the resulting exorbitant prices.

The dramatically improved picture of public health appears to be boosting the labor market, with other data showing on Wednesday an acceleration in private payroll growth last month.

Reports suggest the economy was picking up momentum at the start of the fourth quarter after being held back by the Delta variant of the coronavirus and shortages in the last quarter.

“The recovery continues into the fourth quarter, but supply chain disruptions and hiring challenges will continue to dampen growth,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pa.

“Labor supply is expected to pick up in the coming months, but it will take months for supply chains to return to normal.”

The Institute for Supply Management said its non-manufacturing activity index climbed to 66.7 last month.

It was the highest since the series started in 1997 and followed a reading of 61.9 in September.

A reading above 50 indicates growth in the service sector, which accounts for more than two-thirds of US economic activity.

Economists polled by Reuters had forecast the index to climb to 62.0. The summer wave of infections caused by the Delta variant has subsided, encouraging greater consumption of services like air travel and restaurants.

“Demand shows no signs of slowing down,” said Anthony Nieves, chairman of the ISM Service Firms Inquiry Committee.

“However, current challenges, including supply chain disruptions and labor and material shortages, are limiting capacity and impacting overall business conditions.”

The ISM survey’s measure of new orders received by service companies hit a record high last month. Expenses shift from goods to services. The strengthening of the demand for services stimulated hiring in the leisure / hotel sector, leading to a recovery in the private wage bill.

Private employment increased by 571,000 jobs last month after increasing by 523,000 in September, according to the ADP national employment report. Businesses in the leisure and hospitality sector created 185,000 jobs. Employment in manufacturing increased by 53,000 jobs, while hiring in construction increased by 54,000.

Economists had predicted that the private wage bill would increase by 400,000 jobs.

The ADP report is being developed jointly with Moody’s Analytics and was released ahead of the Ministry of Labor’s employment report for October, due on Friday.

But it has a poor track record in predicting the number of private wages in the Bureau of Labor Statistics’ more comprehensive and closely watched employment report due to methodological differences.

Nonetheless, the report was in line with an improvement in other labor market indicators in October, leaving economists confident that overall job growth picked up in October, although persistent labor shortages remain a challenge.

There were 10.4 million vacancies at the end of August.

According to a survey of Reuters economists, the private sector wage bill probably increased by 400,000 jobs in October.

As government hires have rebounded by 50,000, this would lead to an overall increase in the wage bill of 450,000 jobs.

The economy created 194,000 jobs in September, the least in nine months.

US stocks were trading mixed. The dollar slipped against a basket of currencies. US Treasury prices have fallen.

Part of the ISM service sector index jump in October reflects longer delivery times. The measurement of deliveries from the survey’s suppliers accelerated to 75.6 from 68.8 in September. A reading above 50 indicates slower deliveries.

Longer delivery times for suppliers are normally associated with a strong economy and increased customer demand, which would be a positive contribution to the ISM non-manufacturing index.

In this case, however, slower deliveries from suppliers indicate enduring shortages linked to the pandemic.

This was underscored by the measure of prices paid by the survey’s service industries, which reached 82.9 from 77.5 in September.

Longer delivery times and higher prices reflected the findings of the ISM manufacturing survey released on Monday and added to signs that high inflation may be lingering.

The Federal Reserve said on Wednesday it would start cutting its monthly bond purchases this month, but remained convinced that high inflation was transitory. Inflation is well above the Fed’s flexible 2% target.

The government last week announced a record increase in third-quarter wage growth. A report released on Tuesday showed that the rental vacancy rate fell in the last quarter. Wages and rents are the most persistent components of inflation.

With a shortage of raw materials and labor, unfinished jobs in service industries continued to pile up.

Although the ISM survey’s service sector employment measure fell for a third consecutive month, it remained in expansionary territory. At first glance, this suggests that national employment growth remained subdued in October.

But the signs that the recovery in the labor market is picking up steam are growing. Initial jobless claims fell below 300,000 for the first time since the coronavirus pandemic swept through the United States about 20 months ago.

The Conference Board’s labor market differential – derived from data on consumer opinions about whether jobs are plentiful or hard to come by – has peaked in 21 years.

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