U.S. service sector slows; input prices measure at record high - ISM survey

© Reuters. Customers drink and dine outdoors at the restaurant "Martha" in Philadelphia, Pennsylvania, U.S., August 7, 2021. REUTERS/Hannah Beier

WASHINGTON (Reuters) - U.S. services industry growth unexpectedly slowed in April, with employment contracting for the second time this year, while a measure of input prices raced to a record high.

The Institute for Supply Management said on Wednesday its non-manufacturing activity index fell to a reading of 57.1 last month from 58.3 in March. Economists polled by Reuters had forecast the non-manufacturing index little changed at 58.5.

A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity. The surprise slowdown could reflect persistent supply constraints, which have been worsened by new COVID-19 lockdowns in China and Russia's war against Ukraine.

Coming on the heels of an ISM survey on Monday showing manufacturing growing at its slowest pace in more than 1-1/2 years in April, the slowdown in the services industry could be a potential red flag for the economy.

The economy contracted at a 1.4% annualized rate in the first quarter, though that was largely because of a record trade deficit. Domestic demand remained solid, with consumer spending rising and business investment on equipment accelerating.

The ISM's measure of new orders received by services businesses fell to 54.6 from a reading of 60.1 in March. The moderation came despite spending shifting back to services from goods. Order backlogs also increased at a slower pace relative to March and exports cooled.

Its services industry employment gauge fell to 49.5, the second contraction this year, after rebounding to 54.0 in March. The decline likely reflects perennial worker shortages. The Labor Department reported on Tuesday that there were a record 11.5 million job openings at the end of March.

The contraction, together with a slowdown in factory employment growth last month, could temper expectations for strong job gains in April. According to a Reuters survey of economists, nonfarm payrolls likely increased by 394,000 jobs last month after rising 431,000 in March.

The ISM survey's measure of supplier deliveries increased to 65.1 from 63.4 in March. A reading above 50% indicates slower deliveries. As a result, services inflation accelerated. A measure of prices paid by services industries for inputs increased to an all-time high of 84.6 from 83.8 in March.

The Federal Reserve is expected to hike interest rates by half of a percentage point later on Wednesday, and likely to start trimming its asset holdings soon. The U.S. central bank raised its policy interest rate by 25 basis points in March.