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Economic Report: The U.S. economy is on fire, ISM shows, but labor and supply shortages are a big drag

The numbers: The large service side of the U.S. economy expanded rapidly in May as Americans rushed to do all the things they couldn’t do during the pandemic, but widespread labor and supply shortages kept companies from growing even faster.

A survey of businesses such as retailers, restaurants and hotels climbed to a record high of 64% last month from 62.7% in April, the Institute for Supply Management said Thursday.

Any number above 50% signals expansion and readings above 60% are exceptional.

“The rate of expansion is very strong, as businesses have reopened and production capacity has increased” said Anthony Nieves, chairman of the survey.

Economists surveyed by Dow Jones and The Wall Street Journal had forecast the index would total 62.5%.

Big picture: Americans are eager to go away for vacation, eat dinner out, visit a museum, take in a ball game or do many of the things that were largely off limits in the past year. And they have some extra cash courtesy of the federal government.

The result has been an explosion in sales — and a struggle by many companies to keep up. Labor is in short supply despite high unemployment for example, and prices for virtually everything are on the rise.

Read: Why aren’t Americans happier about the economy? They are paying higher prices for almost everything

Also: U.S. inflation hasn’t been this high since 2008

The price gauge rose again in May and touched the highest level in 13 years.

Labor and material shortages are expected to ease in the months ahead, but it could be awhile before businesses fully regain their footing, prices spikes reverse, and the economy is back to normal.

What they are saying? “Wow. This is what happens when the doors swing open, with stores, restaurants, theaters, gyms, offices, welcoming their customers back with open arms,” said senior economist Jennifer Lee of BMO Capital Markets.

“Supply-chain bottlenecks will gradually ease over the year, and labor supply should pick up as the pandemic fades, schools return to in-person instruction, and the expiration of extra unemployment insurance benefits spurs stronger job-hunting efforts,” said chief economist Gus Faucher of PNC Financial Services.

Key details: All 18 service industries tracked by ISM expanded last month — a rarity. The indexes for production and new orders both increased and topped the 60% mark, pointing to an explosion in demand.

Yet business still can’t keep up.

The biggest obstacles are widespread shortages and soaring prices for key supplies such as lumber, steel, plastics and medical products, among other things.

Read: ‘We are struggling to find employees to help us keep up,’ manufacturers say

In May, the delivery of supplies that businesses need to produce their goods and services slowed again. Executives say they’ve seldom had such trouble obtaining supplies.

“One of the biggest concerns now is shortages of crucial material and equipment,” said an executive at a construction firm.

What many companies did not anticipate was a shortage of labor, especially with the unemployment rate still quite high. Some 8 million people who were working during the pandemic are not working right now.

““Small businesses in the area are reporting stimulus checks and extension of unemployment are hampering their ability to hire workers,” said an executive at a professional firm. “Some employers are reporting they are offering cash incentives of $50 if you show up for an interview.”

The employment barometer slipped 3.5 points to 55.3%.

See: A visual look at how an unfair pandemic has reshaped work and home

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.15%

rose slightly in Thursday trades, but the S&P 500
SPX,
-0.17%

declined.

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