With Big Increase in Business Activity
- The ISM services index rose in September from August and remained firmly in expansion.
- Demand for services is very strong and will further improve into 2022.
- Inventories remain extremely low, but the problem may be easing.
- Production bottlenecks, transportation problems, and labor shortages are all weighing on service industries.
The ISM services index increased to 61.9% in September from 61.7% in August. A reading of above 50% indicates expansion in services industries, and this was the 16th straight month of expansion. The index plunged in April and May 2020 as the pandemic came to the United States, falling below 50%, but has been in growth territory since June 2020.
Two of the four subindices used to compute the overall index fell in September, employment and supplier deliveries. But all four were above 50%, and all but employment were above 60%. Business activity/production jumped a large 2.2 percentage points in September to 62.3%, and new orders remained very strong at 63.5%, up from 63.2% in August.
Supplier deliveries fell slightly to 68.8% in September from 69.6% in August, meaning weight times for supplier deliveries shortened. Normally this is a negative, because shorter delivery times mean weaker demand, but given the supply chain problems throughout the economy, the shorter delivery times are actually good news for businesses.
Three of the six components not used to calculate the overall index were above 50% in September: prices, new export orders, and backlog of orders. Inventories, imports, and inventory sentiment were below 50%. Three of these six subcomponents increased over the month.
Inventories fell again in September, but at a slower pace. According to the inventory sentiment index inventories were too low in September, but at a slower pace than in August. Taken together, these measures suggest that a lack of inventory remains a problem in the U.S. economy, but that this is not as a big a problem as it was over the summer.
Seventeen of the 18 service industries covered in the report reported expansion in September, with the strongest growth in retail trade and arts, entertainment, and recreation. These two industries were hit especially hard during the downturn, and are now coming back thanks to vaccines, pent-up demand, and high household saving. The only service industry to report contraction in September was agriculture, forestry, fishing, and hunting.
The comments from respondents noted very strong demand, but also problems meeting this demand because of low inventories, input shortages, transportation delays, and a very tight labor market.
Despite rising coronavirus cases and the Delta variant, services activity in the U.S. economy continued to recover in September. Households are looking to spend the stimulus payments that they saved in 2020 and the first half of 2021 and feel more comfortable going out with rising vaccinations. Strong demand for services is allowing firms to raise prices. The biggest concerns remain production bottlenecks, low inventories, and labor problems that are limiting the ability of businesses to meet the strong demand.
Service industries will continue to expand through the rest of 2021 and throughout 2022. Consumers have lots of cash saved up and will be looking to spend. Demand for services will be especially strong, given that the pandemic limited households’ ability to spend on services. Production bottlenecks should gradually ease and an increase in the labor supply will allow businesses to meet rising demand in the months ahead. Extremely low inventories remain a problem, but that constraint is starting to ease.
The ISM services index for September is consistent with the results from PNC’s Fall 2021 small business survey, which found very strong optimism, but also concerns about labor supply.
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