US services sector activity accelerated in May, pointing to robust economic growth in the second quarter, but trade tariffs and a shortage of workers posed a threat to the outlook. Other data on Tuesday showed job openings rising to a record high in April, far outpacing hiring. Strengthening economic growth and tightening labour market conditions likely seal the case for a Federal Reserve interest rate increase next week and raise the probability of two more hikes later in the year.
"Whatever speed the economy is growing at, it isn't going to keep moving down the road much longer if there is no one to work the economy's factories and stores and warehouse floors," said Chris Rupkey, chief economist at MUFG in New York. The Institute for Supply Management (ISM) said its non-manufacturing activity index jumped 1.8 points to 58.6, ending three straight monthly declines. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of US economic activity.
The ISM survey added to bullish data on consumer spending, the labour market, manufacturing and trade that have suggested the economy was regaining speed after slowing in the first quarter. Gross domestic product estimates for the second quarter are as high as a 4.8 percent annualized rate. The economy grew at a 2.2 percent pace in the January-March period.
The Trump administration in March announced tariffs for steel and aluminium imports to protect domestic industries from what it says is unfair competition from foreign producers. The government last week extended the duties to steel and aluminium imports from Canada, Mexico and the European Union.
Industries complained that predicting material prices this year had been difficult, with some saying the aluminium tariff had "caused supply interruptions and higher costs." They are also experiencing difficulties finding qualified workers, especially truck drivers, leading to bottlenecks in the supply chain. Wholesalers described the supply chain as "shuttering because of a lack of drivers and equipment causing delays in multiple modes of transportation."
The worker shortage was underscored by the Labour Department's monthly Job Openings and Labour Turnover Survey, or JOLTS report showing job openings, a measure of labour demand, increased by 65,000 to a seasonally adjusted 6.7 million in April. That was the highest level since the government started tracking the series in December 2000.
The number of hires rose 92,000 to 5.6 million in April. The labor market is viewed as being either near or at full employment, with the jobless rate at an 18-year low of 3.8 percent. In April, the number of unemployed people per job opening fell to 0.9 from 1 in March. Economists said the tight labour market could spur faster inflation than currently anticipated by Fed officials. The US central bank holds its next monetary policy meeting on June 12-13. It increased borrowing costs in March and has forecast at least two more rate increases for this year.
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