Strangling capacity constraints chokes US economic growth

The US economic rebound from the Covid crisis slowed sharply this month as severe constraints on capacity led to businesses struggling to scale production, according to a closely watched survey released today.

IHS Markit’s latest flash composite output index for the US slid to 55.4 in August, down from 59.9 in July, hitting a fresh 8-month low.

“The pace of expansion in business activity was… the slowest seen in 2021 so far as service providers and manufacturers reported greater constraints on capacity,” IHS Markit said.

US businesses are struggling to expand staffing levels to cope with historically high demand triggered by consumers unleashing a wave of spending as life returns to pre-Covid conditions.

IHS Markit said employee numbers rose at their slowest rate for over a year, primarily driven by severe shortages in the jobs market.

US workers have been reluctant to return to or find new jobs in part due to concerns over being exposed to the more transmissible Delta variant of Covid. Difficulties securing childcare provision has also been cited as a disincentive for people to engage with the labour market.

Younger workers have re-enetred education to strengthen their skill set in a bid to make themselves more attractive to employers that typically pay higher wages, while others have sought to retrain in order to find employment in other sectors of the economy.

Chris Williamson, chief business economist at IHS Markit, said: “Not only have supply chain delays hit a new survey record high, but the August survey saw increasing frustrations in relation to hiring. Jobs growth waned to the lowest since July of last year as companies either failed to find suitable staff or existing workers switched jobs.”

Shortages of raw materials and key inputs used in production processes has been triggered by global supply chains crumbling under the pressure of a resurgence in demand as economies around the world emerge from Covid restrictions.

However, an uptick in infections in Asia has prompted policymakers to reintroduce strict restrictions on economic activity to curb the spread of new cases. China recently closed the Ningbo-Zhoushan port, the third busiest port in terms of container volume, after a single worker at the site tested positive for Covid.

High demand and depressed supply levels compounded to put upward pressure on prices.

“The rate of input price inflation accelerated to the second-fastest on record (since October 2009), with both manufacturing and service sectors registering a quicker rise in costs,” IHS Markit said.

Activity in the US services industry suffered a heavier hit than the manufacturing sector, largely driven by the spread of the Delta variant dampening consumer confidence and spending.

The flash US services business activity index dipped to 55.2 in August, down from 59.9 in July. The equivalent index for the manufacturing sector fell to 61.2 from 63.4 over the same period.

“Prices look set to continue to rise sharply due to the persistent upward pressure on costs arising from shortages of materials and labor, though if demand continues to cool due to rising case numbers this should alleviate some of the inflationary pressures,” Williamson added.

The warning comes as the Federal Reserve is preparing to host its annual monetary policy symposium at Jackson Hole this week. Analysts are predicting chair Jerome Powell to outline how and when the central bank will begin to wind down its ultra-accommodative monetary measures unleashed to quash the economic impact of the Covid crisis.

Craig Erlam, senior market analyst at OANDA Europe, said: “Jackson Hole looked the ideal platform for a taper warning but now, officials may be more inclined to see how the data unfolds over the weeks before the September meeting before dropping any major hints.”