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Economic Report: Delta deals bigger blow to U.S. economy in August, but most businesses still upbeat

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The numbers: U.S. businesses suffered some erosion in growth in August for the third month in a row owing to the rise of the delta variant and ongoing shortages of labor and materials, a pair of new surveys show.

A survey of service-oriented companies that deal with customers face to face — think restaurants, hotels and theaters — fell to an eight-month low. The index dropped to 55.2 in August from 59.9 in prior month, IHS Markit said Monday.

Another measure of American manufacturers dipped to a four-month low of 61.2 from 63.4, though it was still historically high. Manufacturers are better able to control their work environments and face few government restrictions.

Any number above 50 signals growth, and figures above 60 are viewed as exceptional.

Big picture: Companies are still expanding at a rapid clip, they just aren’t growing as fast as they were several months ago.

The chief reason are persistent shortages of supplies and labor that emerged after the economy mostly reopened in the spring.

High demand and disruptions to global trade have made it harder for businesses to obtain critical materials. And millions of people who were working before the pandemic are still AWOL from the labor force.

The delta variant is compounding those problems and making it particularly worse for service providers. Customers are getting wary again of being in crowds and some states are requiring certain businesses to check for vaccine proof.

Read: Want to buy a new car? Record prices and vehicle shortages abound

Key details: The cost of raw and partly finished materials increased at the fastest pace since IHS began keeping track in 2007. As a result, companies raised prices at the steepest rate on record.

Both of these trends are adding to U.S. inflation and raising costs for consumers.

Manufacturers were largely optimistic about future growth. Their biggest hurdle is getting enough materials and new workers to produce enough goods to keep up with demand. Retaining talented employees has also gotten harder as workers either leave or take better-paying jobs at other companies.

Executives at service companies were still upbeat but somewhat less so than they were a few months ago. The rate of expansion was the slowest in a year because of more delta anxiety among customers, but executives expect growth to improve in the months ahead.

Read: Delta is making Americans nervous and raising fresh worries about the economy

What they are saying? “The expansion slowed sharply again in August as the spread of the delta variant led to a weakening of demand growth, especially for consumer-facing services, and further frustrated firms’ efforts to meet existing sales,” said chief business economist Chris Williamson of IHS Markit.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.77%

and S&P 500
SPX,
+0.93%

rose in Monday trades and hovered near record highs. Gains were slightly trimmed after the IHS report.

The Conversation: Will vaccine skeptics accept the safety of the COVID shot now that the FDA has granted full approval?

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