The service sector registered slower growth in February as inflation and labor shortages remained top concerns, according to a report from the Institute for Supply Management on Thursday.
The services purchasing managers’ index declined 3.4 percentage points to 56.5 on the month, but for the 21st month in a row, since the pandemic hit in 2020, remained in expansion territory. A reading above 50.1 indicates an expansion of the overall economy.
Elevated inflation pushed input costs and wages higher for service providers, causing disruptions in business operations and budget constraints, survey respondents said in the report.
The price index—prices paid by service providers for materials—increased to 83.1% in February, up 0.8 percentage points from earlier months. All 18 industries surveyed reported price increases.
Demand growth also moderated on the month with both the business activity and new order indexes declining sharply. Supply chain bottlenecks, while still an issue, eased somewhat in February as all inventory components of the index improved.
The service sector, which has lagged behind the manufacturing sector because of the pandemic, has been hampered by labor shortages as businesses compete fiercely for employees. Unlike manufacturing, services rely heavily on human capital, a problem that won’t be solved anytime soon as the labor market continues to be imbalanced.
Despite the labor shortage, we expect the sector to continue to grow as we start to enter the post-COVID world where constraints on economic activities fade.