U.S. service sector slows; businesses facing higher costs: ISM survey

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. services industry activity unexpectedly slowed in February amid winter storms, while a measure of prices paid by companies for inputs surged to the highest level in nearly 12-1/2 years, bolstering expectations for faster inflation in the near term.

The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing activity index fell to a reading of 55.3 last month from 58.7 in January, which was the highest since February 2019.

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 unchanged at 58.7. Brutal winter storms lashed Texas and parts of the populous South region in mid-February, leaving millions of people without water and power.

But a drop in new COVID-19 cases and an increase in vaccinations has allowed authorities to roll back some restrictions on restaurants and other consumer-facing businesses. Though the rate of decline in coronavirus infections has stalled, economists still believe the services industry will regain speed in the spring and through summer.

The pandemic, which has disproportionately affected the services industry by shifting demand to goods, has also created bottlenecks in the supply chain through labor shortages at suppliers and manufacturers. That has left businesses with high production costs.

The survey's measure of prices paid by services industries jumped to 71.8 last month, the highest reading since September 2008, from 64.2 in January. It mirrored findings of the ISM's manufacturing survey published on Monday and a surge in consumers' near-term inflation expectations.

Inflation is expected to accelerate in the coming months in part as last year's pandemic-driven weak readings drop out of the calculation. Economists are divided on whether the jump in price pressures will stick beyond the so-called base effects.

U.S. Treasury yields have risen, with investors betting that the Federal Reserve's ultra-easy monetary policy stance and President Joe Biden's push for $1.9 trillion in fiscal stimulus on top of nearly $900 billion in additional pandemic relief in late December will ignite inflation.

Fed Chair Jerome Powell has played down these fears, citing three decades of lower and stable prices. There is also excess capacity in the labor market, with at least 19 million people on unemployment benefits.

But Americans grounded at home by COVID-19 have accumulated excess savings, which can provide dry power for spending. Consumer spending on services remains about 3.3% lower than before the outbreak of the virus in the United States.

The ISM survey's measure of new orders for the services industry fell to a nine-month low of 51.9 in February from a reading of 61.8 in January. But backlog orders jumped to a 55.2 last month from 50.9 in January. Export orders also rebounded strongly, which bodes well for the sector's growth.

The survey's index of services industry employment fell to 52.7 last month from a reading of 55.2 in January.

That could temper expectations for an acceleration in job growth in February. According to a Reuters poll of economists, the government's closely watched employment report on Friday is likely to show nonfarm payrolls increased by 180,000 jobs in February after gaining only 49,000 in January.

The economy has recovered 12.3 million of the 22.2 million jobs lost during the pandemic. Employment is not expected to return to its pre-pandemic level before 2024.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)