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Economic Report: U.S. factories grow at slowest pace in 14 months due to omicron, ISM finds

The numbers: The closely followed ISM barometer of U.S. manufacturing activity slipped to a 14-month low of 57.6% in January as a torrent of omicron cases thumped the U.S. economy and ongoing shortages of labor and supplies gummed up production.

Economists polled by The Wall Street Journal forecast the index to decline to 57.7% from 58.8% in December. Any number above 50% signifies growth. 

Although the index is still quite strong historically, it’s fallen three straight months. Prices for raw materials and others supplies also rose again, complicating the decision by manufacturers on how much to buy.

The good news? Orders and production are still quite robust, a sign of steady customer demand.

“Given the rapid spread of Omicron last month and the number of people missing work from sickness, the results here aren’t as bad as they could be,” said senior economist Will Compernolle of FHN Financial.

The report, compiled by the Institute for Supply Management, is seen as a mirror of the health of the U.S. economy.

Big picture: The U.S. suffered another blow from the coronavirus, but cases are tumbling and the economy has shown great resilience during the pandemic. Business is likely to pick up again soon.

How fast will depend on how quickly the gears of the economy get unstuck and the highest inflation in 40 years begins to wane.

Key details: New orders and production both declined from very high levels.

The index of new orders dropped 3.1 points to 57.9%, the lowest level in a year and a half.

Timothy Fiore, chairman of the survey, said companies have to weigh when to place orders for supplies before producing goods for customers.

‘Do I place my orders now at high prices or wait until they come down,” he said about the issue confronting companies. “I am pretty confident new orders will get back to where we want them to be.”

Employment held steady in the face of greater absenteeism tied to omicron.

The index of prices paid rose to 76.1% from 68.2% in December, erasing some of the big decline at the end of 2021.

The backlog of orders also remained high, reflecting production delays tied to the pandemic. Ports are clogged, warehouse space is limited, trains are overscheduled and truckers are in short supply.

These problems have contributed to widespread product shortages and the highest inflation since the early 1980s.

“Transportation, labor and inflation issues continue to hamper our supply chain and ability to service our customers,” one senior executive told ISM. “Ultimately, the biggest impact is at the consumer level, as [price increases] continue to get passed through.”

Looking ahead: “Steady growth in new orders for manufactured goods leaves room for further growth in employment and output in the factory sector in 2022,” said chief economist Richard Moody of Regions Financial.

Market reaction: The Dow Jones Industrial Average DJIA, +0.03% and S&P 500 SPX, -0.02% were mixed in Tuesday trades.

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