Demand ‘peaks’ as US services recovery slows
The pace of the recovery in the US services industry slowed markedly over the last month, prompted by the initial rebound in demand triggered by the Covid unlocking easing, according to a closely watched survey.
IHS Markit’s US services purchasing managers’ index for July dropped to 59.9, the lowest reading since February of this year, and down from 64.9 in June.
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The latest survey indicates that activity in the US services industry, which accounts for around two thirds of the American economy, is still running hot, but is easing from the initial bounceback engineered by the lifting of Covid restrictions.
American households rushed back to bars, casinos, hairdressers and high streets to purchase products that have been mostly unavailable during the pandemic after measures gradually ended. This provided an initial boon for a large proportion of services businesses.
Consumers have shifted spending from goods to services as the successful vaccine rollout across much of America has enabled policymakers to end restrictions on businesses that generate their income from producing less tangible products.
However, IHS Markit’s latest survey indicates this immediate release of pent-up demand is starting to recede.
Chris Williamson, chief business economist at IHS Markit, said: “This waning of optimism in part reflected the likely peaking of demand in the second quarter as the economy opened up, but also reflected a rising concern over the potential for the Delta variant to disrupt the economy again.”
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A reading above 50 indicates a majority of services firms reported an expansion in activity.
Despite the cooling in activity, new business levels were the strongest since October 2009. International demand was also robust – new export orders grew for the fifth consecutive month.
Inflation still historically high
The cost of inputs used in services firms’ production processes remains elevated and above the survey’s average, IHS Markit said.
Input inflation is being stoked by higher fuel prices, increased wage costs and severe supply chain disruption as suppliers of raw materials buckle under the weight of soaring global demand.
“With the survey once again bringing signs that capacity is being constrained by a lack of raw materials and labour, inflationary pressures look set to persist in the coming months, though it is encouraging to note that the overall rate of increase of selling prices for goods and services continued to moderate from May’s recent peak,” Williamson added.
Cost pressures prompted services firms to increase prices in an attempt to protect margins, IHS Markit said.
US inflation rose at its fastest pace in over a decade last month, hitting 5.4 per cent annually in June.
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