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.

IHS Markit, a data firm, said that its flash U.S. composite PMI Output index, which measures the services and manufacturing sectors, dropped to 54.5 on Thursday. It was the second-lowest reading since August 55.4. The private sector is growing if the reading exceeds 50.

As the economy recovers from the unprecedented disruptions brought about by COVID-19, businesses are facing persistent shortages in raw materials and labour.

There was hope that supply chain would improve soon. However, the Delta version of the coronavirus has caused a worsening of shortages of certain raw materials. These are mainly from Southeast Asia. Congestion in ports in China contributes to tightening supply chains.

The government’s pandemic relief funds will fade, so economists anticipate a sharp decline in gross domestic products this quarter. For the third quarter, growth estimates are for a rate of 2.6% annually. The April-June quarter saw an economy grow at 6.6%.

Due to supply chain bottlenecks persisting, companies continued paying higher input prices. This is a warning sign that inflation may remain high for some time, even though consumer prices have been declining in recent months.

The Federal Reserve increased Wednesday its projections for the key inflation measure from 3.0% to 3.7%. A flexible target of 2% has been set by the U.S. Central Bank. Jerome Powell, Fed Chair, stated to reporters that hiring difficulties and other constraints may prove to again be more severe and lasting than expected. This could pose upside risk to inflation.

IHS Markit’s Flash Services Sector PMI was at a fourteen-month low of 54.4 in September, down from 55.1 in August. Economists polled in Reuters forecast a reading between 55 and 55. The services sector is responsible for nearly two-thirds U.S. Economic Activity.

Weak demand and COVID-19 fears contributed to the slowdown in growth. Survey results showed that export orders were declining at a quicker pace, which was affecting sales.

Also, manufacturing is losing momentum. From a August reading of 61.1, the flash manufacturing PMI was 60.5 in September. The sector accounts for 11.9%. Economists predicted that the index would rise to 61.5.

The survey found that manufacturers reported longer lead time due to issues with trucking and capacity shortfalls. It was the most severe deterioration in vendor performance ever recorded.