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Economic Report: U.S. economy rebounds as coronavirus cases fade, ISM service sector index soars in October

The numbers: Restaurants and other service-oriented companies saw business grow rapidly in October as coronavirus cases fell nationwide, showing the U.S. economy is speeding up again even in the face of persistent labor and supply shortages.

An index of activity based on a survey of business executives jumped to a record 66.7% from 61.9% in September, the Institute for Supply Management said Wednesday. Any reading above 50% signals expansion and numbers above 60% are exceptional.

The increase was much bigger than Wall Street expected. Economists polled by The Wall Street Journal had forecast the ISM services index to total 62%.

Big picture: A fall in coronavirus cases tied to the highly contagious delta variant has given Americans the confidence to go outside again and spend more freely at restaurants, hotels, airports and the like. That’s given a boost to the service side of the U.S. economy that employs the vast majority of Americans.

The biggest worries now are shortages of both workers and supplies. Companies can’t find enough people to hire or get enough materials to produce as many goods and services as they would like to sell.

Read: ADP says U.S. hiring revs up as private sector adds 571,000 new jobs

The shortages have spawned the biggest surge in inflation in 30 years and threaten to draw out the U.S. recovery, especially if prices continue to grow faster than wages.

Read: U.S. inflation rises sharply again in August and stays at 30-year high

Key details: New orders and production both rose to record highs and all 18 industries tracked by ISM expanded in October — a rarity.

Companies managed to grow even faster even though employment softened. A gauge of employment fell to 51.6% from 53% and touched a four-month low.

Firms are rushing to adopt more automation to speed things up, but ongoing labor and supply shortages have raised costs and made it harder for them to meet demand. The backlog of unfilled orders also hit a record high.

“While new opportunities continue to present themselves, we are turning work away due to delayed shipments from suppliers and the general lack of new workers,” one executive told ISM, echoing comments from other business leaders.

What they are saying? “Demand is red-hot,” said senior U.S. economist Andrew Hunter of Capital Economics, but “supply is still struggling to keep up.”

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.15%

and the S&P 500
SPX,
-0.11%

fell in Wednesday trades, but stocks remained near record highs.

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