WASHINGTON – Growth in the service sector, where most Americans work, reached an all-time high in November, surpassing a record set the month before.
The Institute for Supply Management reported on Friday that its monthly survey of service industries rose 2.4 percentage points in November from October’s record high at a reading of 69.1%. Any reading above 50 indicates growth.
Data for the service sector is released against the backdrop of an employment landscape in which hiring appeared to slow in November, but the unemployment rate fell from 4.6% to 4.2%. This is a historically low unemployment rate, but still above the pre-pandemic level of 3.5%.
Part of the strength of the service sector comes from supply chain issues that make it more difficult to meet increased demand. These issues show up in the index in the form of longer supplier delivery times and rising prices, which are strengths for the service industry.
The recent increase in covid-19 cases and now the emergence of the new omicron variant could depress service sector activity in the coming months.
“We suspect this survey overstates the outlook for the service sector, especially as rising rates of coronavirus infection in the Northwest and Midwest will weigh on high-contact service activity over the course of the year. ‘winter,’ said Paul Ashworth, chief US economist for Capital Economics.
The increase in November was led by a rise in the business activity index and a gain in the employment index. The new orders index remained at a high reading of 69.7.
All 18 industries in the service sector saw growth in November and since recording two months of contraction last year in April and May when the pandemic raged, the overall index has now risen for 18 straight months.
Anthony Nieves, head of the institute’s service sector investigation committee, said responses to the November report were gathered before reports began to come out on the new variant of omicron. He said that while the new variant may affect the business of the service industry, it will depend on the extent of the new variant and the increase in infections.
Responses from companies in the service sector showed that delays in the supply chain and difficulties in finding workers were having a pervasive impact.
A respondent to the foodservice survey indicated that “labor shortages, transportation delays and supply constraints” were big issues.
Oren Klachen, chief US economist at Oxford Economics, predicted that “substantial restrictions on the supply side will continue to limit expansion even if omicron does not turn out to be a significant threat.”
Inflation has peaked in three decades, in large part due to the squeeze in supply and labor, which exacerbates the supply problem.
In its Beige Book report this week, the Federal Reserve said businesses were complaining of “persistent difficulties in hiring and retaining employees” with many leisure and hospitality businesses still limiting hours of operation due to ‘a lack of workers.
The report says companies have heard various reasons for labor shortages. These included lack of child care, retirements, and lingering safety concerns related to persisting covid cases. The investigation was also carried out before the emergence of the new omicron variant.
“Almost all of the districts have reported strong wage growth,” the Fed said. “Hiring difficulties and high turnover rates have led companies to raise wages and offer other incentives, such as bonuses and more flexible working arrangements.”