US service sector growth picks up in January

© Reuters. A hiring sign is seen at the register of Burger Boy restaurant, as many restaurant businesses face staffing shortages in Louisville, Kentucky, U.S., June 7, 2021. REUTERS/Amira Karaoud/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. services sector growth picked up in January as new orders increased and employment rebounded, but suppliers appeared to fall behind, resulting in a measure of input prices rising to an 11-month high.

The Institute for Supply Management (ISM) said on Monday that its non-manufacturing PMI increased to 53.4 last month from 50.5 in December. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the index rising to 52.0.

The report added to January’s blowout employment gains in suggesting that economic growth momentum from the fourth quarter spilled over into the new year. It also further diminished the chances of an interest rate cut in March.

The Federal Reserve left interest rates unchanged last week, but Chair Jerome Powell told reporters that rates had peaked. Since March 2022, the U.S. central bank has raised its policy rate by 525 basis points to the current 5.25% to 5.50% range.

After initially surging as Americans resumed normal lives following COVID-19 lockdowns, spending on services has been trailing outlays on goods. But the pace has been strong enough to keep inflation elevated.

A measure of new orders received by services businesses rose to 55.0 last month from 52.8 in December. There was a jump in export order growth.

A measure of prices paid for inputs by businesses increased to 64.0, the highest reading since last February, from 56.7 in December. Though services prices remain high, overall inflation is cooling, with the personal consumption expenditures price index excluding food and energy rising at a 2% annualized in the fourth quarter, bang on the Fed’s 2% target.

The ISM survey’s measure of supplier deliveries rebounded to 52.4 from 49.5 in December. A reading above 50 indicates slower deliveries.

The re-emergence of supply constraints was also evident in the ISM’s manufacturing survey last week, amid delays caused winter storms. Attacks on cargo vessels in the Red Sea by Yemen-based Houthi, which have forced shipping companies to avoid the route through the Suez Canal, could disrupt supply chains.

The ISM survey’s measure of services sector employment bounced back to a reading of 50.5 after plunging to 43.8 in December. It has, however, not been a good gauge of the labor market’s health. Nonfarm payrolls increased by the most in a year in January, with wages posting their biggest monthly gain in nearly two years, the government reported last Friday.

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