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A sign tells diners that COVID-19 vaccinations and masks are required indoors at Sam's Grill & Seafood Restaurant, in San Francisco, Calif., on Aug. 20.Eric Risberg/The Associated Press

U.S. services industry activity grew at a moderate pace in August, but there are tentative signs that supply constraints and surging prices are starting to subside, suggesting that any slowdown in economic growth this quarter will be temporary.

The Institute for Supply Management said on Friday its non-manufacturing activity index slipped to 61.7 last month after racing to 64.1 in July, which was the highest reading in the series’s history.

A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index falling to 61.5.

Economists have sharply marked down their gross domestic product estimates for the third quarter to as low as a 2.9-per-cent annualized rate from as high as a 9-per-cent pace, citing the latest wave of COVID-19 infections, fading fiscal stimulus and supply constraints, which have boosted prices.

The economy grew at a 6.6-per-cent rate in the second quarter. Economists expect growth will pick up in the fourth quarter as supply bottlenecks and inflation ease.

The ISM survey’s measure of supplier deliveries fell to 69.6 last month from a reading of 72.0 in July. A reading above 50 indicates slower deliveries. With deliveries improving, prices moderated. A measure of prices paid by services industries fell to 75.4 after surging to near a 16-year high of 82.3 in July.

That mirrored the findings of the ISM manufacturing survey published on Wednesday and offered more evidence that inflation has probably peaked. Data last week showed the Federal Reserve’s preferred inflation measure recorded its smallest monthly gain in five months in July.

Despite August’s slowdown in activity, services industries remain supported by the rotation of spending from goods to services as the economy normalizes after being severely disrupted by the pandemic.

The ISM survey’s measure of new orders received by services businesses dipped to a reading of 63.2 from 63.7 in July. With inventories lean and inventory sentiment among customers poor, orders should continue to grow. Businesses depleted inventories in the first half of the year.

Services industries maintained a steady pace of hiring last month. A measure of services industry employment dipped to 53.7 after rebounding to a reading of 53.8 in July. That likely reflects a continuing shortage of workers caused by the pandemic.

Though 8.7 million people are officially unemployed, businesses are struggling to fill a record 10.1 million job openings. Lack of affordable child care, fears of contracting the coronavirus, generous unemployment benefits funded by the federal government as well as pandemic-related retirements and career changes have been blamed for the disconnect.

The labour shortage is expected to ease starting September. The government-funded unemployment benefits lapse on Sept. 6 and schools are reopening for in-person learning. But surging new COVID-19 cases, driven by the Delta variant of the coronavirus, could make some people hesitant to return to the labour force.

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