U.S. Services Growth Cools to Almost One-Year Low on Omicron

(Bloomberg) -- Growth in the U.S. services sector pulled back in January to the slowest pace in nearly a year as a surge in Covid-19 cases and lingering supply constraints weighed on business activity.

The Institute for Supply Management's gauge of services activity fell to 59.9, the lowest since February of last year, from 62.3 a month earlier, according to data released Thursday. Readings above 50 signal expansion and the January print was in line with economists' projections in a Bloomberg survey.

The moderation in growth last month followed a 6.1-point plunge that was the sharpest since April 2020, indicating the omicron variant of the coronavirus continued to discourage spending on in-person services like travel and dining out.

“Respondents continue to be impacted by coronavirus pandemic-related supply chain issues, including capacity constraints, demand-pull inflation, logistical challenges and labor shortages,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement.

“Moreover, the Covid-19 omicron variant has disrupted operations, especially through reduced staffing levels,” Nieves said.

Fifteen industries reported growth last month, led by construction, retail trade and health care.

The ISM's index of orders and its measure of business activity, which parallels the group's gauge of factory production, also dropped to 11-month lows. In November, those measures as well as the overall services index, were at or near the strongest in data back to 1997.

Even with the latest omicron-related setback, the figures remain well above pre-pandemic levels and reflect still-strong demand as Americans benefit from mostly steady job and income growth.

Delivery Times

The latest report also indicated persistent supply-chain challenges, likely exacerbated by the recent wave of infections. The group's index of supplier delivery times edged up to 65.7, signaling extended delays in procuring materials.

The effects of omicron were also evident in the ISM's measure of export orders, which plunged in January by a record 15.6 points. The measure of bookings for overseas customers dropped to 45.9, the lowest level since May 2020.

Select ISM Industry Comments
“Supply constraints and outages persist. With mechanical component parts, the problems are severe. We are finding widespread depletion of field service part inventories to sustain factory production of new product orders.” - Accommodation & Food Services
“Costs have escalated to what we believe are unsustainable levels. Available labor is nonexistent, so we have cut staffing and are taking on fewer projects temporarily in an attempt to reduce cost.” - Construction
“Business activity is increasing, but professional labor continues to be in short supply.” - Finance & Insurance
“Business outlook remains cautiously optimistic, although uncertainty remains concerning the impact of omicron, inflation and the lack of major improvements to supply chain issues.” - Retail Trade
“Constrained supplies of many key product groups continue. Inflation worsening; however, sales and profitability continue to be strong.” - Wholesale Trade
“Supply chain disruptions continue. Hiring of clinical and nonclinical staff continues to be very difficult due to high demand.” - Health Care

The ISM's index of services employment eased as well, falling to a seven-month low of 52.3 from 54.7. Private-sector employment decreased by 301,000 in January, the biggest drop since April 2020 as omicron hit the labor market, a report from the ADP Research Institute showed Wednesday.

The services report also illustrated inflationary pressures continue to linger. The ISM measure of prices paid by service providers eased to 82.3 from a record-high of 83.9 in December.