WASHINGTON (Reuters) -A measure of U.S. services industry activity surged to a record high in March amid robust growth in new orders, in the latest indication of a roaring economy that is being boosted by increased vaccinations and massive fiscal stimulus.
The upbeat survey from the Institute for Supply Management (ISM) on Monday followed news on Friday that the economy added 916,000 jobs in March, the most in seven months. Economic growth this year is expected to be the strongest in nearly four decades.
“Vigorous services activity in March sets the stage for robust expansion in the second quarter,” said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “All the right pieces for a faster services recovery – expanded vaccine eligibility, reopenings, and historic fiscal expansion – are falling into place.”
The ISM’s non-manufacturing activity index rebounded to a reading of 63.7 last month also due to warmer weather. That was the highest in the survey’s history and followed 55.3 in February.
A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index rising to 59.0 in March.
The ISM said comments from services industries indicated that “the lifting of COVID-19 pandemic-related restrictions has released pent-up demand for many.” It, however, noted that “production-capacity constraints, material shortages, weather and challenges in logistics and human resources continue to cause supply chain disruption.”
The survey added to a raft of reports from manufacturing to consumer confidence and employment in suggesting that the vastly improved public health situation and the White House’s $1.9 trillion COVID-19 pandemic rescue package were providing a powerful tailwind to the economy.
The ISM reported last week that its measure of national manufacturing activity soared to its highest level in more than 37 years in March. The services industry, hardest hit by the pandemic, could accelerate further as the economy re-opens. The U.S. Centers for Disease Control and Prevention said on Friday fully vaccinated people could safely travel at “low risk.”
U.S. stocks were trading higher, with the S&P 500 and the Dow hitting record highs. The dollar fell against a basket of currencies. U.S. Treasury prices were lower.
COST PRESSURES RISING
The ISM survey’s measure of new orders for the services industry rebounded to an all-time high of 67.2 in March from a nine-month low of 51.9 in February.
Supply constraints are raising costs for businesses. The survey’s measure of prices paid by services industries jumped to 74 last month, the highest reading since July 2008, from 71.8 in February.
The surge in these price measures have added to concerns of higher inflation this year. But some economists say they are not reliable predictors of future inflation. Price pressures are seen driven by the generous fiscal stimulus and extremely accommodative monetary policy.
The ISM survey’s measure of services industry employment shot up to 57.2 last month, the highest reading since May 2019, from 52.7 in February. That confirmed the sharp acceleration in private services industry employment in March.
A separate report from the Commerce Department on Monday showed new orders for U.S.-made goods fell in February, likely weighed down by unseasonably cold weather. Factory orders dropped 0.8% after surging 2.7% in January.
Economists polled had forecast factory orders slipping 0.5% in February. Orders increased 1.0% on a year-on-year basis.
The weakness in factory orders is likely temporary and left intact expectations for robust gross domestic product growth in the first quarter. Growth estimates for the last quarter are as high as an annualized rate of 10.0%. Growth this year could top 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, the worst performance in 74 years.
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