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The numbers: Restaurants, hotels and theme parks like Disney are still doing tons of business after the full reopening of the U.S. economy, but they face a new challenge from the delta variant even as they scramble to cope with widespread labor and supply shortages.
A survey of service-oriented businesses rose to record 64.1% in July from 60.1% in the prior month, the Institute for Supply Management said Wednesday.
Economists surveyed by Dow Jones and The Wall Street Journal had forecast the index would total 60.5% in July.
Any reading above 50% signals expansion, and numbers above 60% are exceptional.
Big picture: Companies that provide services such as dining, accommodations, entertainment and leisure finally saw a sense of normalcy in the spring and early summer as more people got vaccinated and coronavirus cases shrank. These businesses suffered greatly early in the pandemic.
Yet the sudden explosion in new delta cases is causing fresh strains on their business. Governments are reinstituting new mask requirements and some locales are requiring businesses to check customers for vaccination cards.
The good news is, the virus is not as dangerous given the millions of vaccinated Americans and companies have learned how to cope with the pandemic. The delta variant probably won’t deal a severe blow to the economy unless caseloads go a lot higher.
Read: The U.S. economy is bigger than ever, but it’s still got a few big problems
Key details: New orders and the level of production rose again in July and were near all-time highs. The survey goes back to 1998, when the service sector was not as large as it is now.
Employment also turned positive again after a negative reading in June.
Companies have offered higher pay, bonuses or other benefits to try to attract more workers. Some companies have so much business they have to turn customers away because they are short-staffed. Millions of people who lost their jobs during the pandemic or left on their own still haven’t returned.
“Business continues to gain speed as the economy recovers and assuming there won’t be additional government-mandated lockdowns,” said an executive at a real estate company.
Read: Jobless claims retreat from two-month high in sign delta hasn’t hurt much
Getting supplies on time and at reasonable prices is another problem. Businesses have had to pay more for materials and they’ve passed some of the cost on to customers.
The result: A steep increase in inflation this year. Rising prices pose another threat to the economy recovery because inflation erodes the buying power of U.S. households.
Read: Inflation surges again as shortages plague U.S. economy
“Costs have risen dramatically in the last 45 days,” a top executive at a constructions company said. “Lodging, fuel, travel and supplies are all rising sharply.”
Seventeen industries tracked by ISM reported growth in July. None contracted.
What they are saying? “Some may try to get cute with describing the economy, but the reality is not exactly rocket science,” said chief economist Stephen Stanley of Amherst Pierpont Securities. “The economy is literally bursting at the seams, as demand is as strong as I have ever seen it and supply is struggling to catch up.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and the S&P 500
SPX,
fell in Wednesday trades.
