- Activity in the service sector picks up in March
- Trade deficit drops 0.1% to $89.2 billion in February
- Exports jumped 1.8%; imports accelerate by 1.3%
WASHINGTON, April 5 (Reuters) – U.S. service industry activity picked up in March, boosted by the rollback of pandemic-related restrictions, but rising fuel and other commodity prices due to of Russia’s war against Ukraine creates uncertainty for many businesses.
Tuesday’s survey from the Institute for Supply Management showed that capacity constraints and inflation remained major challenges, although labor shortages eased. According to Anthony Nieves, chairman of the ISM Services Business Survey Committee, the Russian-Ukrainian war “has had an impact on material costs, including fuel and chemical prices.”
“The services sector enters the second quarter on solid footing, but two risks continue to cloud the near-term outlook,” said Bernard Yaros, economist at Moody’s Analytics in West Chester, Pennsylvania. “The first is Russia’s invasion of Ukraine and the second risk remains COVID-19.”
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The ISM said its non-manufacturing activity index rebounded to 58.3 last month from a one-year low of 56.5 in February, ending three straight monthly declines. It also signaled a shift in spending towards services rather than goods.
COVID-19 restrictions have been lifted across the country following a massive drop in infections, triggering pent-up demand for services such as air travel and restaurants. But COVID-19 cases are increasing in Europe and China.
Economists polled by Reuters had expected the non-manufacturing index to rise to 58.4. A value above 50 indicates an expansion of the service sector, which accounts for more than two-thirds of US economic activity.
Prices of commodities like oil, wheat and fertilizers have jumped since Russia invaded Ukraine on Feb. 24.
Seventeen service industries recorded growth, including educational services, arts, entertainment and recreation, as well as utilities, construction, wholesale trade, and accommodation and food services . Only agriculture, forestry, fishing and hunting recorded a decline.
Industry companies said “grain and fertilizer prices are near record highs, leading to lower purchases.” In the construction sector, there have been complaints that “price pressures are stronger than ever due to the Russian-Ukrainian war and energy costs are skyrocketing”.
Companies in the utilities sector said they were “still experiencing shortages of raw material sub-components, transportation delays and price increases”. Similar views were shared by their counterparts in the wholesale sector who said inflation was getting worse but noted that “overall sales and profitability continue to be strong.”
The ISM’s measure of new orders received by service businesses rebounded to a reading of 60.1 from a 12-month low of 56.1 in February.
Its service industry employment indicator jumped to 54.0 after falling to a year-and-a-half low of 48.5 February, which was also the sub-index’s first contraction since January 2021.
The improving labor supply was confirmed by the March jobs report on Friday, which showed nonfarm payrolls increased by 431,000 jobs last month. Read more
Despite the increase in hiring, service industries have made little progress in reducing the backlog of unfinished work.
This means that services inflation has increased. The survey’s measure of prices paid by service industries hit a record near 83.8 from 83.1 in February, indicating that inflation could remain uncomfortably high and prompt an aggressive response from the Federal Reserve.
The US central bank last month raised its key rate by 25 basis points, the first hike in more than three years. On Tuesday, Fed Governor Lael Brainard told a Fed conference in Minneapolis that “I think we can all agree that inflation is too high and cutting inflation is paramount importance”.
Stocks on Wall Street were trading lower. The dollar (.DXY) appreciated against a basket of currencies. US Treasury prices fell.
RECORD TRADE DEFICIT
The spike in commodity prices due to the Russian-Ukrainian war was evident in a separate Commerce Department report, which showed the US trade deficit held at a record $89.2 billion in February. , while exports and imports increased.
The report added to recent data that showed a moderation in consumer and business spending by suggesting the economy slowed significantly in the last quarter amid high inflation triggered by shortages. Economists had forecast a deficit of $88.5 billion.
Exports of goods and services jumped 1.8% to a record $228.6 billion. They were boosted by a 1.8% jump in goods exports, which also reached an all-time high. Oil exports hit a record high of $20.3 billion amid soaring crude oil prices.
Exports of consumer goods increased by $1.3 billion. But exports of capital goods fell amid a decline in civilian aircraft.
Exports to Ukraine hit a record high, likely reflecting shipments of military hardware. Services exports rose $1.3 billion to $69.9 billion, boosted by a $1.2 billion increase in travel.
Imports of goods and services jumped 1.3% to an all-time high of $317.8 billion. Imports of goods rose 0.6% to a record high of $266.2 billion. Imports of industrial supplies and materials were the highest since June 2011. They were fueled by a $1.9 billion rise in crude oil, which averaged $76.37 a barrel, the higher since November 2014.
Imports of capital and consumer goods hit record highs. Imports of services rose $2.4 billion to $51.6 billion, reflecting increases in fees for the use of intellectual property, transportation and travel.
The import surge is fueled by business restocking, the main driver of gross domestic product growth in the fourth quarter.
“While much of the strength in imports appears to reflect inventory rebuilding, which should normally boost growth, the record pace of inventory rebuilding at the end of last year means that inventories should also be an additional drag in the first quarter,” said Andrew Hunter, senior US economist at Capital Economics.
Trade has detracted from gross domestic product growth for six consecutive quarters. Growth estimates for the first quarter range from an annualized rate as low as 0.4% to as high as 2.8%. The economy grew at a 6.9% pace in the fourth quarter.
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Reporting by Lucia Mutikani; Editing by Andrew Heavens and Paul Simao
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