By Lucia Mutikani
WASHINGTON (Reuters) - U.S. services sector activity picked up in June amid strong growth in new orders, but trade tariffs and a shortage of workers were starting to strain the supply chain, which could slow momentum in the coming months.
While other data on Thursday showed private payrolls rising less than expected last month and a surprise increase in new applications for unemployment benefits last week, overall labor market conditions continue to tighten.
The labor market is considered to be near or at full employment, with the jobless rate at an 18-year low of 3.8 percent. The unemployment rate has dropped by three-tenths of a percentage point this year and is near the Federal Reserve's forecast of 3.6 percent by the end of this year.
The Institute for Supply Management (ISM) said its non-manufacturing activity index rose 0.5 point to 59.1 last month. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.
The survey's new orders index jumped 2.7 points to 63.2, but a measure of backlog orders fell 4.0 points to 56.5. A gauge of prices paid by services industries for inputs fell 3.6 points last month.
The ISM said while service industries continued to be optimistic about business conditions and the overall economy, "there is a continuing concern relating to tariffs, capacity constraints and delivery." Similar complaints have also been echoed by manufacturers.
The Trump administration has imposed tariffs on a range of imported goods, including steel and aluminum, to protect domestic industries from what it says is unfair competition from foreign manufacturers. Major trade partners, including China, Canada, Mexico and the European Union, have retaliated with their own tariffs, raising the specter of a trade war.
Economists have warned the import tariffs could disrupt the supply chain, undermine business investment and raise prices for consumers, and wipe out the stimulus from a $1.5 trillion tax cut package that came into effect in January.
"As with the manufacturing report released on Tuesday, there was plenty of anecdotal evidence that tariffs were beginning to have an impact, but with the prices balance falling in June and new export orders rising, there is little sign that this is affecting the economy yet," said Michael Pearce, senior U.S. economist at Capital Economics in New York.
TRUCK DRIVER SHORTAGE
Services industries also complained about difficulties finding qualified workers, especially truck drivers, which some said was "getting worse each month." There are a record 6.7 million unfilled jobs.
The ISM survey's measure of service industry employment slipped in June, but continued to show growth. Some industries said they "need to hire more people," and others noted that "employee retention is getting much more competitive."
Separately, the ADP National Employment Report showed private employers hired 177,000 workers in June, less than market expectations for a 190,000 gain. Private payrolls increased by 189,000 jobs in May.
While the ADP report is generally not seen as a good predictor of the government's closely watched employment report, which is scheduled for release on Friday, it supported expectations of some cooling in job growth in June after May's robust gains.
According to a Reuters survey of economists, nonfarm payrolls likely increased by 195,000 jobs last month, adding to the 223,000 positions created in May.
The dollar fell to a three-week low against a basket of currencies while prices for longer-dated U.S. Treasuries rose slightly. Stocks on Wall Street were trading higher.
In a third report on Thursday, the Labor Department said initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 231,000 for the week ended June 30. It was the second straight weekly increase in jobless claims.
Economists polled by Reuters had forecast claims falling to 225,000 in the latest week. Some economists blamed the rise in claims on automobile manufacturers shutting down assembly lines for annual retooling.
"We had been expecting a move up like this because we thought that temporary auto plant shutdowns would lead to more initial claims filings during the week ending June 30 than normal for comparable weeks in recent years," said Daniel Silver, an economist at JPMorgan (NYSE:JPM) in New York.
"We think that the temporary plant closures, which usually are on and off for about a month in the weeks around July 4, are likely generating noise in the claims data now, so we do not think that the increase in claims over the past two weeks is an especially negative sign for the labor market."
The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2,250 to 224,500 last week.