US Service Sector Driving Economy Forward Despite Inflation Worries

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Supplies of iron, steel, chemicals and gold flowed into the US economy at a faster pace in June, increasing the country's trade deficit
Supplies of iron, steel, chemicals and gold flowed into the US economy at a faster pace in June, increasing the country's trade deficit

The U.S. economy is making strides in the face of COVID-19 and the ongoing supply chain problems that are pushing prices higher. This is the finding of the latest data accompanying IHS Markit’s Manufacturing Purchasing Managers' Index (PMI) that was released on Friday. 

According to IHS Markit's Flash U.S. Composite PMI Output Index, the U.S. economy posted a "sharp" 57.3 in October, up from 55.0 in September in what IHS says is the fastest uplift in activity in three months. Under IHS' methodology, any score over 50 signals an improvement.

Driving this positive score for October was a strong showing from the U.S. service sector and a decrease in concerns about the COVID-19 Delta variant. In this sector, the U.S. scored 58.2 on the U.S. Services Business Activity Index, up from 54.9 in September. With the easing of the Delta variant situation, new work began flowing to U.S. businesses at the fastest rate recorded since July. 

"October saw resurgent service sector activity as COVID-19 case numbers continued to fall, marking an encouragingly strong start to the fourth quarter for the economy," said Chris Williamson, Chief Business Economist at IHS Markit.

However, the same could not be said for the manufacturing sector. On the IHS scoring for the Flash U.S. Manufacturing Output Index, the economy scored 52.3, down from 55.7 in September and a new low not seen in 15 months. The overall Manufacturing PMI fared better at 59.2, but it was still a 7-month low point. 

The reason for this weakness is the same problems of supply chain bottlenecks and labor shortages that have bedeviled policymakers in the White House and the Federal Reserve. The combination has placed strong inflationary pressures on the economy, raising prices at what IHS Markit and other indexes consider a record pace. 

Williamson warned that these inflationary elements show "no sign of abating" especially as demand remains strong and costs of production stay stubbornly high. 

The federal government has taken steps to try and address inflation to keep it in check. Given the record backlog at U.S. ports, President Joe Biden announced new partnerships with the private sector last week to ensure goods are delivered in time. Members of his cabinet have also been pushing policies that would increase production and bring on more workers who can help ease the supply shortages at stores. 

The Federal Reserve has also indicated that it will be moving in the direction of tapering off its multibillion-dollar monthly asset purchases soon. 

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