US Economy: Why The Service Sector Is Growing At A Surprisingly Slower Rate

The U.S. service industries grew at a slower pace than expected for June due to a labor shortage.

The Institute for Supply Management’s service index dropped by four points, its growth reaching 60.1 compared to May’s 64. Readings above 50 indicate expansion.

New orders, supply deliveries and business activity also lowered.

A Bloomberg survey on Monday shows demand is still high for services like restaurant dining, hotel stays and travel. The struggle lies in a short in the supply chain -- the ISM’s measure of order backlogs was the highest in the service industry data back to 1997.

This slower June growth is partly a reflection of employer’s struggle to find workers. ISM’s index of services employment dropped to the lowest level this year, plummeting to 49.3 from 55.3 in May. Other impediments can be found in contraction in the supply chain.

Chair of the ISM’s Services Business Survey Committee, Anthony Nieves, said in a statement that this growth drop is just a “slight pullback” and the “rate of expansion in the services sector remains strong.”

“Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions,” he added.

Service providers see an all-time low in their inventories. ISM reported an almost two-point contraction in inventories and supplier deliveries.

Supplier delivery times remain elevated due to truck availability, slower rail services, port congestion and container shortages, Nieves told Bloomberg.

Overall, the economy and the service sector are still growing. However, a decline in supply when demand remains high could reflect in an increase in overall prices.