Service sector

US economy rebounds as coronavirus cases fade, ISM services sector index soars in October

Numbers: Restaurants and other service-oriented businesses saw business grow rapidly in October as coronavirus cases fell nationwide, showing the US economy is accelerating again even in the face of persistent labor shortages work and supply.

An activity index based on a survey of business leaders jumped to a record 66.7% from 61.9% in September, the Institute for Supply Management said Wednesday. Any reading above 50% signals expansion and numbers above 60% are exceptional.

The increase was much larger than Wall Street expected. Economists polled by the Wall Street Journal had expected the ISM services index to total 62%.

Big picture: A drop in coronavirus cases linked to the highly contagious delta variant has given Americans the confidence to go out again and spend more freely at restaurants, hotels, airports, and more. This has boosted the service side of the US economy which employs the vast majority of Americans.

The biggest worries now are shortages of workers and supplies. Businesses cannot find enough people to hire or obtain enough materials to produce as many goods and services as they would like to sell.

Read: ADP says U.S. hiring increases as private sector creates 571,000 new jobs

The shortages have spawned the biggest spike in inflation in 30 years and threaten to set back the US recovery, especially if prices continue to rise faster than wages.

Read: US inflation rises sharply again in August and remains at its highest level in 30 years

Key details: New orders and production both hit record highs and all 18 industries tracked by the ISM grew in October – a rarity.

Firms managed to grow even faster even as employment fell. An employment indicator fell to 51.6% from 53% and hit a four-month low.

Businesses are rushing to adopt more automation to speed things up, but labor and supply shortages have increased costs and made it harder for them to keep up with demand. The unfilled order book also reached a record level.

“As new opportunities continue to arise, we are turning down work due to delayed supplier deliveries and a general lack of new workers,” one executive told ISM, echoing comments from other business leaders.

what do they say? “Demand is hot,” said US economist Andrew Hunter of Capital Economics, but “supply is still struggling to keep up.”

Market reaction: The Dow Jones Industrial Average DJIA,
-1.30%
and the S&P 500 SPX,
-1.89%
fell in Wednesday’s trading, but shares remained near record highs.