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Economic Report: Service side of U.S. economy growing at slowest pace in a year, ISM shows

The numbers:  A 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.

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. 

Big picture:  Omicron disrupted the economy in December and January, but cases area falling fast and 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.

What’s more, the ISM report showed that ongoing shortages of materials and labor continue to hold back growth and prevent a full recovery.

These shortages have also forced business 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.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.30%

and S&P 500 index
SPX,
+0.16%

index  rose in Thursday trades.

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