Economic Report: Economy cools off, ISM finds, as firms cope with shortages and omicron
The numbers: CVS, Citibank, Wal-Mart and other service-oriented companies that dominate the economy grew slower in December, a survey showed, just as omicron began to add fresh stress on a U.S. recovery still suffering from broad labor and supply shortages.
The Institute for Supply Management’s services index dropped to 62% last month from a record 69.1% in November. Readings above 50% signal expansion and numbers above 60% are considered exceptional.
“It’s still reflective of a very strong rate of growth,” said Anthony Nieves, chairman of the survey. “It’s a matter of leveling off” from very high levels in the past few months.
Economists polled by The Wall Street Journal forecast the index to fall to 66.8%.
The lower ISM reading in December doesn’t capture much of the impact of omicron, however. The new strain didn’t explode until toward the end of the month.
Big picture: While the survey still shows strong growth in the economy, parts of the service industry are likely to experience hiccups as omicron works its way through the population. Restaurants and entertainment venues in particular.
“This variant is not as strong or as severe as we’ve seen in the past,” Nieves said. “But it’s still impacting the ability to staff.”
Still, the biggest problem for most companies in the longer run are ongoing shortages of labor and supplies.
Businesses can’t find all the workers and materials they need and the cost of everything is going up. The pace of consumer inflation soared to 6.8% in November and hit the highest rate in almost 40 years.
The material shortages appear to be starting to ease, Nieves suggested, but economists say it could take up to a year or more before supply chains return to normal.
Key details: New orders, production and hiring all slowed in December, though companies were still doing brisk business.
Companies are still having trouble obtaining supplies and getting materials delivered quickly.
They are also paying a lot more for what they need. The prices index rose slightly to 82.5% — the third highest reading ever.
“Supply chain challenges to procure supplies for our restaurants remains our greatest obstacle at present, along with staffing needs,” said a food-industry executive. “We are considering another price increase after just one in 2021.”
Most executives also reiterated it was hard to find good help.
“Labor shortages are causing issues,” a wholesale executive said. “We could do much more business if we had more people and access to more products.”
What they are saying? “Reading the comments from the respondents, it was difficult to glean any signs that the broader problems were easing,” said senior economist Jennifer Lee of BMO Capital Markets.
Market reaction: The Dow Jones Industrial Average DJIA, -0.20% and S&P 500 SPX, +0.22% fell in Thursday trades. Investors are expecting the Federal Reserve to start raising interest rates soon to combat a huge increase in inflation.