The backbone of the US economy roared back to life at record speed in March

New York outdoor dining
People dine at an outdoor Soho restaurant on March 21, 2021, in New York City.
  • The Institute for Supply Management's services gauge hit a record high in March as the country reopened.
  • Services count for 70% of US output, meaning the March rebound underscores a strong recovery.
  • The headline index rose to 63.7 from 55.3, beating all economist forecasts.
  • See more stories on Insider's business page.

After the freeze, comes the thaw. For the US economy, the pandemic era stopped the all-important service sector in its tracks. Now a spring thaw is emerging in more ways than one.

The Institute for Supply Management's index of service businesses rose to 63.7 last month from 55.3, according to a Monday release. The level surpasses the previous record set in October 2018 and implies the fastest rate of expansion since data collection began in 1997. The reading also beat all estimates from economists surveyed by Bloomberg.

Readings above 50 indicate industry expansion, while those below the threshold signal contraction.

The institute's measure of business activity and production gained to 69.4 from 55.5 throughout last month. New orders rose 15.3 points to 67.2, underscoring a healthy pickup in consumer demand. A gauge of service-sector prices gained to 74 from 71.8, hinting that reopening and fresh stimulus will fuel stronger inflation.

The data affirms hopes that reopening will quickly revive the economy. Service businesses account for roughly 70% of US gross domestic product, meaning a full rebound from the coronavirus recession hinges on how such firms recover in the coming months.

"Looking ahead, services sector growth is poised to accelerate in the spring and summer," Oren Klachkin, lead US economist at Oxford Economics, said. "The health situation overall is now much better since late-2020, and expanding vaccine eligibility will allow badly damaged services, namely leisure and hospitality, to reopen."

The rebound was also broad-based. All 18 of the service sectors tracked by ISM grew in March. The improvement follows a surprise decline in February linked to harsh winter storms. ISM's headline index indicated growth throughout the winter, but the season's surge in virus cases and subsequent restrictions blocked a swifter recovery.

Businesses responding to the organization's survey indicate that relaxing lockdown measures "released pent-up demand" throughout the industry, Anthony Nieves, chair of ISM, said in a statement. That demand now represents the biggest constraint on businesses; production-capacity limits, material shortages, and logistics challenges are all contributing to supply chain disruptions, Nieves added.

The report caps a month of largely encouraging data releases. Manufacturers also enjoyed strong growth, albeit at a slower rate than seen in previous months. Consumer sentiment reached one-year highs. And perhaps most importantly, jobs data published on Friday showed 916,000 payrolls added throughout March. The reading handily exceeded the median economist estimate.

ISM's report suggests the labor market's rebound will continue into the summer. The institute's employment gauge rose to 57.2 in March from 52.7, with nearly one-quarter of businesses saying they took on more workers.

One respondent noted it rehired all of its temporarily laid-off workers and made new hires. Another cited strong demand at new locations as the reason it hired more employees.

The US economy saw bouts of on-and-off recovery throughout the pandemic. Now, as vaccination picks up and businesses reopen, the green shoots of spring are abounding.

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