By Lucia Mutikani

WASHINGTON (Reuters) – U.S. private payrolls increased less than expected in February amid job losses in manufacturing and construction, suggesting the labor market was struggling to regain speed despite the nation’s improving public health picture.

Part of the labor market’s problems appear to be rooted in a shortage of workers. Other data on Wednesday showed job growth in the services industry retreated last month, with businesses reporting they were “unable to fill vacant positions with qualified applicants” and “need more resources to meet demand.”

The year-long COVID-19 pandemic is keeping some workers at home, fearful of accepting or returning to jobs that could expose them to the coronavirus. The data was published ahead of the government’s closely watched employment report on Friday, and could temper expectations for an acceleration in job growth in February. The ADP’s private payrolls report, however, has a poor track record predicting the private payrolls count in the government’s more comprehensive employment report.

“This is a disappointment given that the drop-off in coronavirus case numbers and the resulting lifting of containment measures should be giving the economy a bigger shot in the arm,” said Paul Ashworth, chief economist at Capital Economics in Toronto.

Private payrolls rose by 117,000 jobs last month after increasing 195,000 in January, the ADP National Employment Report showed. The report is jointly developed with Moody’s Analytics. Economists polled by Reuters had forecast private payrolls would increase by 177,000 jobs in February.

Construction employment fell by 3,000 jobs and manufacturing payrolls decreased 14,000. Hiring in the services sector increased by 131,000 jobs, with the leisure and hospitality industry adding 26,000 positions. Harsh weather in some parts of the country was also likely a factor holding back gains.

Still, the labor market has been slow to regain traction even as some restrictions on services businesses have been rolled back amid a drop in new COVID-19 infections and hospitalizations. Though the rate of decline in coronavirus cases has stalled, economists still believe the labor market will regain momentum in the spring and through summer.

In a separate report on Wednesday, the Institute for Supply Management (ISM) said its measure of services sector employment fell to a reading of 52.7 in February from 55.2 in January.

The lack of significant improvement in the labor market is also despite nearly $900 billion in additional pandemic relief provided by the government in late December, which boosted consumer spending and positioned the economy for faster growth in the first quarter.

Gross domestic product growth estimates for the first quarter have been raised to as high as a 10% annualized rate from as low as a 2.3% pace. The upgrades also reflect President Joe Biden’s $1.9 trillion recovery plan, under consideration by Congress. The economy grew at a 4.1% rate in the fourth quarter.

“Historically, employment lags GDP by a quarter or so,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “Everything from that (GDP) front looks good, we are expecting substantial job growth in the not-too-distant future.”

Stocks on Wall Street were mostly lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

RISING COSTS

According to a Reuters poll of economists, the government will likely report on Friday that nonfarm payrolls increased by 180,000 jobs in February after rising only 49,000 in January.

Hopes for a pick-up in hiring last month were supported by a survey last week showing consumers’ perceptions of the labor market improved in February after deteriorating in January and December. In addition, a measure of manufacturing employment increased to a two-year high in February.

The retrenchment in services employment last month contributed to the ISM’s broader non-manufacturing activity index declining to a nine-month low of 55.3 in February from a reading of 58.7 in January. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity.

Economists had forecast the index unchanged at 58.7. The decline likely reflected brutal winter storms, which lashed Texas and parts of the populous South region in mid-February.

The lack of qualified workers at suppliers and manufacturers is creating bottlenecks in the supply chain, leaving businesses with high production costs. The survey’s measure of prices paid by services industries jumped to 71.8 last month, the highest reading since September 2008, from 64.2 in January.

It mirrored findings of the ISM’s manufacturing survey published on Monday and a surge in consumers’ near-term inflation expectations.

Inflation is expected to accelerate in the coming months in part as last year’s pandemic-driven weak readings drop out of the calculation. Economists are divided on whether the jump in price pressures will stick beyond the so-called base effects.

U.S. Treasury yields have risen, with investors betting that the Federal Reserve’s ultra-easy monetary policy stance and White House’s proposed massive stimulus will ignite inflation.

Many services businesses complained about supply delays and labor shortages. Wholesalers reported an “ongoing influx of price increases due to raw-material shortages.” Retailers said “price increases are occurring with more frequency,” while accommodation and food services noted suppliers were proposing “price increases that are above and beyond normal expectations.”

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)