U.S. Service Industries Expand at Slowest Pace in Nine Months

(Bloomberg) -- Growth at U.S. service providers slowed to a nine-month low in February as companies grappled with logistical challenges and rising prices at the same time a stretch of severe winter weather gripped much of the nation.

The Institute for Supply Management's services index fell to 55.3 during the month from an almost two-year high of 58.7 in January, according to data released Wednesday. Readings above 50 signal growth and the February figure was weaker than the most pessimistic forecast in a Bloomberg survey of economists.

The group's measures of orders and business activity also plummeted to the lowest levels since May. While many service providers remain constrained by the pandemic, the setback in February included an arctic blast that disrupted supply chains, caused blackouts and impeded commerce in some areas.

“Respondents are mostly optimistic about business recovery and the economy. Production-capacity constraints, material shortages and challenges in logistics and human resources are impacting the supply chain,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in statement.

The polar vortex brought record-cold temperatures to more than 9,000 U.S. cities. The most severe case occurred in Texas, where the state's power grid was overwhelmed and millions of residences went without lights, heat and water.

The weather “one of the variables for sure one of the factors in there but not the big one. The big one I feel right now has to do with capacity constraints due to increased demand and not having the output, coupled with the logistics issues,” Nieves said on a conference call with reporters.

Seventeen service industries reported growth during the month, led by accommodation and food services, wholesale trade, transportation and warehousing, and construction.

Backlogs Rise

In a sign the slowdown in services activity is temporary, the ISM index of order backlogs rose to a six-month high of 55.2, while a gauge of export demand was the strongest since June.

The services figures also showed prices paid for materials jumped to 71.8 in February, the highest since September 2008. Delivery times also lengthened. The group's manufacturing data, released Monday, showed input costs for factories were also the highest since 2008.

Both reports indicate that supply shortages and labor constraints remain obstacles across a broad swath of industries.

Select ISM Industry Comments

“Suppliers are taking the opportunity with the commodity-price increases in the last few months to propose price increases that are above and beyond normal expectations, causing significant concern. “ - Accommodation & Food Services

“Sales of residential real estate continue to be strong, even outstripping supply. Cost inflation in building materials seen as shortages develop from sporadic Covid-19 closures at manufacturing facilities.” - Construction

“Supplier deliveries continue to be an issue as well as lead-times. Additionally, price increases are occurring with more frequency for products containing raw materials such as copper and steel.” - Retail Trade

“We are seeing an ongoing influx of price increases due to raw-material shortages, labor shortages, and transportation delays.” - Wholesale Trade

“Many materials have inconsistent lead times or are facing delivery delays.” - Utilities

The ISM's index of services employment indicated slower growth in February, falling to 52.7 from 55.2. Another report on Wednesday from the ADP Research Institute showed companies added fewer workers during the month than forecast.

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