Economic Report: The red-hot U.S. economy cools off, ISM finds, because of major shortages and not enough workers

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The numbers: Restaurants, retailers and other businesses that compose the huge service side of the U.S. economy simply cannot find enough people to fill open jobs or get all the supplies they need to keep up with exploding sales.

A survey of service-oriented businesses fell to 60.1% in June from a record 64% in May, the Institute for Supply Management said Tuesday.

The problem is not a lack of demand. Customers have been clamoring for more and more goods and services for months as the coronavirus waned, the U.S. fully reopened and the government poured massive doses of stimulus into the economy.

What’s holding companies back is the inability to obtain enough supplies on time or to attract enough people to do the work. These shortages are boosting the cost of materials and labor and adding upward pressure on inflation.

Read: U.S. manufacturers have all they business they can handle, but major shortages are a big headache

In normal times, any survey reading above 50% signals expansion and a reading above 60% would be exceptional. Except that these aren’t normal times.

Economists surveyed by Dow Jones and The Wall Street Journal had forecast the index would total 63.3% in June.

Big picture: The economy is booming after more than a year of being depressed by a global pandemic. The problem is the rush of pentup demand has overwhelmed the ability of companies to keep up.

There are still lingering disruptions in the flow of goods and services within the U.S. and throughout the world economy. And millions of people still haven’t returned to work, making it all but impossible for companies to fill a record number of open jobs.

These problems are expected to persist through the end of the summer and contribute to the highest burst of inflation since 2008.

Key details: New orders and the level of production were both extremely high in June.

The biggest problems were getting critical supplies on time and at a reasonable price. Ongoing shortages have delayed production and raised costs.

“Severe supply chain disruptions and inflation are continuing in the marketplace, in all sectors,” said a senior executive at an entertainment company.

Finding and retaining employees is another frustration. A gauge of employment contracted in June for the first time this year (49.3% in June vs. 53.3% in May).

Read: There are plenty of jobs, but not enough people to fill them. What’s going on?

Companies can’t recruit enough people for open jobs despite still-high U.S. unemployment. And many of their workers are leaving for other, often better-paying jobs.

“Labor market remains tight, and wages have risen at an unprecedented rate,” said an executive at a shipping and transportation company.

In some cases, especially at restaurants, companies have had to cut back hours or days of operation because they don’t have enough staff, another executive said.

“It’s going to take awhile for these problems to clear up,” said Anthony Nieves, chairman of the ISM services survey.

What they are saying? “Here’s the silver lining: At least consumers have the ability to make such demands for goods and services. It would be worse if they couldn’t,” said senior economist Jennifer Lee of BMO Capital Markets.

“Shortages and price increases are becoming an increasing drag on hiring and economic activity,” said senior U.S. economist Michael Pearce of Capital Economics.

Market reaction: The Dow Jones Industrial Average

and the S&P 500

fell in Tuesday trades.

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