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Economic Report: Businesses grow at slowest pace in 11 months during omicron wave, ISM services survey finds

The numbers:  A barometer of U.S. business activity at service sector companies such as restaurants and retailers slid 2.4 points in January to a 11-month low of 59.9%, ISM said Thursday, during a record coronavirus outbreak that sapped the economy.

The Institute for Supply Management’s index of service companies that employ most Americans touched the lowest level since February 2021. The omicron variant of coronavirus exacerbated ongoing labor and supply shortages.

““We are considering another price increase after just one in 2021 in August.””

— Food-industry executive

Numbers over 50% are viewed as positive for the economy, however, and anything over 55% is considered exceptional.

A similar ISM survey of manufacturers also showed companies growing at a somewhat slower pace early in the new year.

Big picture:  Businesses big and small, in manufacturing and services, all took a hit last month as the contagious omicron strain of the coronavirus raced across the country. Millions of people called in sick.

Service sector companies suffered the most because they usually deal with customers directly and are more affected by government restrictions.

With omicron fading, companies are likely to rebound quickly. Yet many are still struggling to cope with persistent labor supply shortages that are expected to last through the end of the year.

Key details: New orders and business production expanded at a slower but still very strong pace in January.

The index for new orders dropped 8.2 points to 61.5% and the production gauge slid 7 points to 67.6%.

The employment barometer also softened to 54.9% from 56.5%, but it held up better than expected. Businesses are loath to lay off workers, even temporarly, because of the worst labor shortage in decades.

“Labor shortages are causing issues. We could do much more business if we had more people and access to more products,” said an executive at a wholesaler.

A gauge of inflation showed little improvement. The so-called prices paid index was basically flat at 82.5% and remained near an all-time high.

“We are considering another price increase after just one in 2021 in August,” said an executive at a restaurant chain. Other executives also said they had raised prices or were considering doing so.

Looking ahead: Businesses “continue to struggle with inflation, supply chain disruptions, capacity constraints, logistical challenges and shortages of labor and materials,” said Anthony Nieves, chairman of the ISM services survey.

Market reaction: The Dow Jones Industrial Average DJIA, -0.67% and S&P 500 index SPX, -1.28% declined in Thursday trades.

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