US service sector growth slows sharply in February

WASHINGTON — Growth in the services sector, where most Americans work, slowed sharply in February with hurdles related to the pandemic hindering growth.

The Institute for Supply Management said today that its index of service sector activity dropped to a reading of 55.5% in February, down 3.4 percentage-points from January when activity neared a two-year high.

Even with the decline, it was the ninth straight month of growth in the services sector. Any reading above 50 signifies growth.

Economists had expected some rollback from the January high but the size of the February drop was much bigger than expected, driven by a sharp decline in the new orders index. That fell to 51.9%, down from a January reading of 61.8%. The index readings for business activity and employment also fell from the previous month.

Andrew Hunter, senior U.S. economist for Capital Economics, noted that price pressures jumped sharply in February with the prices paid index climbing to a reading of 71.8%, a level that he said signaled that the Federal Reserve’s preferred price gauge could be rising by around 2.4% within the next few months.

The Fed’s target for inflation is 2% but Fed officials have said they are expecting a temporary jump in prices in coming months as the country re-opens but they do not expect the inflation readings to last.

Anthony Nieves, chair of the ISM’s services survey committee, said that higher energy prices were impacting the supply chain which is heavily dependent on trucks to transport products to retail stores and other establishments.

Many analysts saw the slowdown in services sector activity in February as just a brief pullback from January’s high level with further gains coming in the months ahead.

“The services sector is locked and loaded for a summer surge,” said Oren Klatchin, lead U.S. economist at Oxford Economics. “Encouraging Covid statistics, accelerating vaccine distribution and the Biden administration’s push to make vaccines available to every adult American by the end of May offer hope the health crisis’ end is nearing.”

In their survey responses, the ISM report said that service sector businesses were mostly optimistic about the recovery although they did cite supply chain problems such as production-capacity restraints and material shortages among the problems they are facing.