Service Sector Remains Strong Despite Inflation's Grip

The largest part of the U.S. economy is continuing to hold up.

Macy Norman, center, serves a table of guests at Puckett's Grocery and Restaurant, Sept. 10, 2021, Nashville.
Macy Norman, center, serves a table of guests at Puckett's Grocery and Restaurant, Sept. 10, 2021, Nashville.
AP Photo/Mark Humphrey, File

NEW YORK (AP) — The largest part of the U.S. economy is holding up against the hottest inflation in four decades and the threat of a potential recession.

Hotels, restaurants and other businesses that provide services have managed to keep gaining ground through the summer, according to the latest survey from the Institute for Supply Management. The sector has been expanding since May, and August's gain was the biggest so far this year.

“Business activity is the highest since December, an important breakpoint, as the consumer showed stable demand for services after the headwinds of war, inflation and geopolitical uncertainty," said Jeffrey Roach, chief economist for LPL Financial, in a note to investors.

Inflation remains Wall Street's main concern as investors try to gauge how the Federal Reserve will continue its rate hikes in order to tame higher prices. But several reports from the government suggest that inflation may be easing and some drivers of higher prices, including gas prices and food commodities, have also been dropping.

For example, prices paid by purchasing managers have been falling since April. In August, prices hit their lowest point of the year.

“We continue to be really pleased with the recovery and resilience of the business in the summer,” Kathleen Oberg, chief financial officer of Marriott International, said at a recent business conference.

The hotel chain's revenue per available room, a key industry metric, rose 2% globally in July compared with 2019. A recession would definitely impact the industry, she said, but support from several areas of the economy remain strong.

“I think you’ve still got some pent-up revenge travel, if you will, of people trying to make up. You’ve still got excess savings that have not been worked off. And you’ve also got a really strong labor market,” Oberg said.

The airline industry benefitted from a jump in demand over the summer, prompting several carriers to give investors encouraging updates on operations. United Airlines expects demand to remain strong past the summer and increased its revenue projections for the current quarter.

Restaurant and food service companies are also holding their ground as consumers continue to spend. Starbucks surprised Wall Street with record revenue during its quarter that ran from April to June and noted that it hadn't yet seen any measurable impact on sales from inflation.

Investors and economists remain cautious about the road ahead for the economy, though. While services account for roughly 70% of the economy, the strength there hasn't been enough to offset the impact to gross domestic product from supply chain problems that have kept many products stuck in factories and waiting to be shipped.

Inflation is seemingly easing its grip, but the Fed has been resolute in its plan to keep raising interest rates in order to make sure that it reins in high prices. That could potentially slow the economy too much and throw it into a recession.

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