Service sector tracker hits record high as economy recovers from COVID-19: analysis

A closely watched gauge of U.S. service sector activity hit a record high in March as the recovery from the COVID-19 pandemic kicked into another gear, according to a report released Monday.

The Institute for Supply Management (ISM) said Monday that its purchasing managers’ index for non-manufacturing businesses rose to 63.7 in March. The index rose 8.4 percentage points to eclipse the previous record of 60.9 percent set in October 2018. 

March’s increase was the tenth consecutive rise in the ISM service sector index which investors and analysts track carefully for insight on the strength of the economy. An index reading above 50 points indicates expansion and a reading below 50 indicates contraction.

“There was a substantial increase in the rate of growth in the services sector in March,” said Anthony Nieves, chair of the ISM’s services business survey committee.

“The lifting of coronavirus (COVID-19) pandemic-related restrictions has released pent-up demand for many of their respective companies’ services,” Nieves added.

The record-breaking ISM report is the latest sign of surging economic activity in the U.S. fueled by accelerating COVID-19 vaccinations, loosening restrictions and rising confidence in the outlook.

The U.S. added 916,000 jobs in March, the Labor Department reported Friday, far exceeding the consensus 675,000 gain projected by economists. The ISM manufacturing index also rose to its highest level since 1983 in March.

ISM reported growth in each of the 18 economic sectors it tracks, and noted that companies were struggling with supply lags and shortages as activity ramped back up.

“Production-capacity constraints, material shortages, weather and challenges in logistics and human resources continue to cause supply chain disruption,” Nieves said. 

The U.S. economy is strongly rebounding from the coronavirus pandemic, which caused the steepest and quickest economic decline since the Great Depression. Roughly 8 million of the more than 20 million jobs lost to the pandemic have not yet been replaced, and millions of U.S. households are still struggling to pay for basic expenses after more than a year.

The strengthening economy also helps President Biden and Democrats make the case for Biden’s $2.5 trillion infrastructure proposal funded by corporate tax hikes. Republicans, who are no fans of tax hikes generally, have argued that the U.S. economy is too weak to handle higher taxes, though many economists disagree.