Implications: The service sector continued to expand rapidly in June, although at a slower pace than the record-setting clip in May. Looking at the details, sixteen of eighteen industries reported growth in June, with only two reporting declines. Survey respondent comments echoed an increasingly common theme in the post-pandemic recovery: strong consumer demand fueled by widespread vaccination and easing COVID restrictions held back by supply-chain disruptions, rising input prices, and difficulty finding new workers. A respondent from the accommodations & food service industry put it best, noting "Our restaurants are quickly — maybe too quickly — returning to 2019 sales levels. Strong consumer demand for dining out is clearly evident as COVID-19 restrictions ease, but the challenges are supply chain outages, logistics delays and employee- and management-staffing constraints. Some locations cannot open for business or (have) limited hours, as we cannot staff the restaurant to meet consumer demand." These issues were reflected in the numbers as well. First, the supplier deliveries index remains elevated at 68.5 in June, while the backlog of orders index shot up to 65.8 from 61.1, hitting the highest reading for the series since it began in 1997. Second, upward pressure on prices was reflected in the prices paid index, which declined slightly but remains just off the highest level in more than a decade. The details show that thirty-three commodities were reported up in price while five were reported down in price. Twenty-one were listed in short-supply. Notably, labor was one of the commodities that was both rising in cost and in short supply. The shortage in labor (caused by excessively generous unemployment benefits) helps explain the decline in the employment index to 49.3, the first reading in contraction territory since December. We anticipate employment activity will rise the in the second half of 2021, as benefits expire. The two most forward-looking indices – business activity and new orders – both posted declines in the month of June. However, measures of both current production and new orders are above 60, indicating very strong demand for services. It's clear the service sector would be expanding even more rapidly if it weren't for the above-mentioned factors holding back output.
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Posted on Tuesday, July 6, 2021 @ 2:34 PM
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