The U.S. economy’s service side slowed in April due to high inflation and shortages

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The numbers:  An ISM barometer of business conditions at service-oriented companies such as banks, retailers and hospitals fell 1.2 points in April to 57.1% and signaled that labor and supply shortages as well as high inflation are hurting the economy.

Economists polled by The Wall Street Journal had forecast a flat reading of 58.3%.

Numbers over 50% are viewed as positive for the economy and anything over 55% is considered exceptional.

Yet the survey shows a cooler service economy compared to the end of last year, when the index topped 60% for 10 months in a row. High inflation is a big reason why. The so-called prices paid index, a measure of inflation, rose to a record high.

A similar survey from the Institute of Supply Management of American manufacturers also posted the softest growth in April in 18 months.

Demand is not the issue — businesses still have more than they can handle. Ongoing shortages of labor and supplies, high energy prices and the worst bout of inflation in 40 years are the biggest hurdles.

Big picture: Service-providing companies have rebounded from the decline in coronavirus cases and a shift in consumer spending toward “experiences” instead of goods. Think leisure and entertainment instead of clothes or new televisions.

Yet companies of all stripes are facing rising costs and some customers are balking at higher prices.

The Federal Reserve is also aiming to raise interest rates sharply to try to tame inflation, an approach that threatens to reduce demand and slow the economy.

Key details:

  • The new orders index fell 5.5 points to 54.6%. That’s the weakest reading in 14 months.

  • The production gauge rose 3.6 points to 59.1%, but it’s more backward-looking.

  • The employment barometer sank 4.5 points to 49.5%, the second negative reading in the past three months.

  • The prices-paid index edged up to a record 84.6% from 83.8%.

“Inflation, supply chain issues and access to qualified workers continue to be issues,” an executive in public administration told ISM.

“Cost pressures beginning to slow demand,” said a wholesale executive.

Looking ahead: Both ISM reports this week reflected “an inability to find and retain workers, not a softening in demand for them,” said chief economist Stephen Stanley of Amherst Pierpont Securities. ““Business activity remains strong, however.”

Market reaction: The Dow Jones Industrial Average
rose slightly in Wednesday trades and the S&P 500

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