An extremely disappointing nonfarm payrolls report showed hiring in leisure and hospitality flatlined last month, underscoring worries about the Delta variant’s capacity to constrain activity in the services sector.
42,000 jobs were lost in food services, where businesses are particularly vulnerable to virus concerns.
It’s against that backdrop that the market was compelled to digest the latest read on ISM services, which unsurprisingly showed activity decelerated in August from the prior month.
Mercifully, the headline print was actually a tick better than estimates. At 61.7, it was down meaningfully from July, but still suggestive of robust expansion. Even so, the business activity gauge decelerated by seven points.
Earlier, the final read on IHS Markit’s services sector PMI for the US printed a touch lower from the flash estimate, at 55.1.
Note that the employment gauge in the Markit survey fell to 50.1 last month. “Growth slowed sharply in the US service sector in August, joining the manufacturing sector in reporting a marked cooling in demand and encountering growing problems finding staff and supplies,” Chris Williamson, Chief Business Economist at IHS Markit, said Friday. “Jobs growth almost stalled among the surveyed companies and supplier lead times are lengthening at a near record rate.”
ISM services is coming off a record high in July (figure above) so August’s deceleration isn’t terribly alarming. But the writing is on the wall. The US economy is past “peak growth,” even as it’s still growing.
“There was a pullback in the rate of expansion, however, growth remains strong for the services sector,” ISM’s Anthony Nieves remarked, adding that “the tight labor market, materials shortages, inflation and logistics issues continue to cause capacity constraints.”
And there it is again. For the umpteenth time: Bottlenecks, disruptions and various sources of “friction” persist, virtually unabated. And that’s partly responsible for the slowdown.
“While the resulting overall pace of economic growth signaled is the weakest seen so far this year, backlogs of uncompleted work are rising at a rate unprecedented in at least 12 years, underscoring how supply and labor shortages are putting the brakes on the recovery,” IHS Markit’s Williamson said, before noting that the current conjuncture makes higher prices “inevitable.”
In short, the US economy overheated sometime in July. And now we’re seeing the other side of that in the August data.
Input prices and selling prices in the US services sector rose sharply again last month, continuing what Williamson described as “the steepest period of price growth yet recorded by the survey by a wide margin.” ISM’s prices paid gauge fell, but even after a seven point drop, it still stood at 75.4.
As one respondent in Accommodation & Food Services put it, “manufacturing-labor shortages, logistics delays and lack of material to make products are significantly disrupting our business.”
Thanks for this post. We will see what happens when the kiddos go back to school and extra unemployment ends. While base case thoughts are that the economy will continue to improve, the change probably is not destined to be linear with all the frictions out there. It seems like there will be more surprises in both directions.
Not so sure about the impact of expiring unemployment benefits. For two months in Maine, the state offered a $1500 cash payment to any jobless person who took a job and held it for two months. When the program ended, only 400 out of a pool of about 32,000 people had taken up the offer. Meanwhile food & hospitality jobs at $15/hour continue to go unfilled.
A one-off anecdotal curiosity? Perhaps not:
https://www.wsj.com/articles/states-that-cut-unemployment-benefits-saw-limited-impact-on-job-growth-11630488601?mod=searchresults_pos4&page=1
Like you say, we can be assured that there will be more surprises. It keeps life interesting, I suppose.
The month(s) ahead look whiplash-y with “peak Delta”, the end of federal PUA benefits, the end of eviction/foreclosure moratoria in most states, and continued will-they-or-won’t-they on infrastructure, all in September. The companies worst-hit by Delta and supply chain disruptions (auto OEMs, etc) should pre-announce in Sept, others may miss in Oct. In October we “should” be seeing employment rebounding (if not, something is really wrong), share repurchase windows will be re-opened, and the seasonally hopeful 4Q will be underway. Also tax increase proposals, more Xi Thought, and PFOF regulation.