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The numbers: An ISM barometer of business conditions at service-style companies such as retailers and restaurants fell 3.4 points in February to a one-year low of 56.5%, reflecting still-severe shortages of supplies and labor that are hampering the economy.
Economists polled by The Wall Street Journal had forecast a reading of 61% in the Institute for Supply Management’s services index.
“ “We are getting price increases with no notice. “”
Numbers over 50% are viewed as positive for the economy and anything over 55% is considered exceptional, but the index has fallen three straight months.
A similar ISM survey of manufacturers, however, showed improvement in February. Other economic indicators, what’s more, point to a recent rebound in growth as omicron fades.
Big picture: Omicron disrupted the economy in December and January, but cases are falling fast, allowing businesses and consumers to resume normal activities.
Service-oriented companies that now dominate the U.S. economy have generally fared worse during major viral outbreaks. Their workers deal directly with customers and their businesses are more affected by government restrictions.
The ISM report also showed that ongoing shortages of materials and labor continue to hold back growth and prevent a full recovery.
These shortages have also forced businesses to pay more for supplies and charge customers higher prices in return, contributing to the highest U.S. inflation in 40 years.
The Russian war on Ukraine and prospect of the Federal Reserve raising interest rates soon have also added to the uncertainty in the short run.
Key details: New orders and production both softened last month, employment fell into negative territory and prices paid for supplies rose to the third highest level on record, ISM said.
The index for new orders dropped 5.6 points to 56.1% — also a one-year low — and the production gauge fell 4.8 points to 55.1%.
The employment barometer slid to 48.5% from 52.3%, the first negative reading since last June.
“Employee turnover within our company and with our suppliers is causing delays in decisions and orders,” said an executive at a financial company.
A gauge of inflation showed no improvement. The so-called prices paid index edged up to 83.1%, the second highest level during the pandemic and third highest reading on record.
“We are getting price increases with no notice. For example, our engineered wood products supplier gave us a 10% to 20% increase, effective immediately. We are also struggling to get materials.” said an executive at a construction company.
Looking ahead: “We continue to expect a bounce back in services activity over the spring as the reopening gains momentum,” said economist Katherine Judge of CIBC Economics.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500 index
SPX,
index rose in Thursday trades.
