U.S. business activity grows at slowest pace in 12 months - IHS Markit survey

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. business activity expanded at its slowest pace in a year in September amid relentless supply constraints and peaking demand, in line with expectations for a sharp slowdown in economic growth in the third quarter.

Data firm IHS Markit said on Thursday its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 54.5 this month. That was the lowest reading since September 2020 and followed 55.4 in August. A reading above 50 indicates growth in the private sector.

Businesses are struggling with perennial shortages of raw materials and labor as the economy normalizes following unprecedented disruptions caused by the COVID-19 pandemic.

There had been optimism that the supply chains would adjust soon, but the Delta variant of the coronavirus has worsened the scarcity of some raw materials, produced primarily in Southeast Asia. Congestion at ports in China is also contributing to keeping the supply chains tight.

Economists are anticipating a significant slowdown in gross domestic product this quarter also as the boost from pandemic relief money from the government fades. Growth estimates for the third quarter are as low as a 2.6% annualized rate. The economy grew at a 6.6% pace in the April-June quarter.

With bottlenecks in the supply chains persisting, businesses continued to pay higher prices for inputs, a sign that inflation could remain hot for a while even though the monthly pace of consumer price increases has been slowing in recent months.

The Federal Reserve on Wednesday raised its projection for its key inflation measure to 3.7% this year from 3.0% in June. The U.S. central bank has a flexible 2% target. Fed Chair Jerome Powell told reporters that "hiring difficulties and other constraints could again prove to be greater and longer lasting than anticipated, posing upside risks to inflation."

The IHS Markit survey's flash services sector PMI fell to a 14-month low reading of 54.4 in September from 55.1 in August, Economists polled by Reuters had forecast a reading of 55 this month for the services sector, which accounts for more than two-thirds of U.S. economic activity.

The moderation in growth reflected less robust demand conditions and ongoing COVID-19 worries. According to the survey, sales were also hampered by a faster pace of decline in new export orders.

Manufacturing is also losing steam. The survey's flash manufacturing PMI fell to 60.5 this month from a reading of 61.1 in August. Economists had forecast the index for the sector, which accounts for 11.9% of the economy, would edged up to 61.5.

Manufacturers reported longer lead times as trucking issues and capacity shortages led to what the survey said was one of the greatest deteriorations in vendor performance on record.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)