Services PMI Shows Accelerated Growth
The U.S. services sector expanded at a faster pace in December, according to the Institute for Supply Management (ISM). The nonmanufacturing purchasing managers index (PMI) rose to 54.1 from 52.1 in November, surpassing economists’ expectations of 53.3.
A PMI reading above 50 indicates growth in the sector, which accounts for more than two-thirds of the U.S. economy. ISM considers readings above 49 over time as indicative of economic expansion.
Key Indicators of Economic Strength
The increase in services PMI adds to recent data, including robust consumer spending, suggesting a strong economic performance in Q4. The ISM’s business activity index jumped to 58.2 in December from 53.7 in November, while the new orders measure rose to 54.2 from 53.7.
These figures reflect heightened demand in the services sector, further bolstered by optimism following President-elect Donald Trump’s election victory in November. Hopes for tax cuts and deregulation have brightened business sentiment, though concerns linger about potential inflation from higher tariffs and other policy measures.
Rising Input Prices Point to Inflation Pressures
The ISM survey’s prices paid measure, which tracks the cost of services inputs, surged to 64.4 in December, marking the highest level since February 2023. This jump from 58.2 in November signals persistent inflationary pressures, consistent with the Federal Reserve’s caution regarding interest rate cuts.
Progress in reducing inflation to the Fed’s 2% target stalled in the latter half of 2024, with a resilient economy underpinning price stability.
Fed Policy Outlook
The Federal Reserve delivered a third consecutive rate cut in December, reducing the benchmark interest rate by 25 basis points to a range of 4.25%-4.50%. However, the Fed projects only two interest rate reductions in 2025, compared to the four previously anticipated, reflecting the labor market’s resilience and overall economic strength.
The Fed had raised its policy rate by 5.25 percentage points in 2022 and 2023 to curb inflation.
Employment Trends
The ISM survey’s measure of services employment held steady at 51.4 in December, but it has not always been a reliable predictor of services payrolls in official employment reports. Nonfarm payrolls are expected to have grown by 154,000 in December, down from the 227,000 reported in November, according to a Reuters survey. The unemployment rate is projected to remain at 4.2%.
Economic Implications
While demand in the services sector remains robust, the surge in input costs adds complexity to the Federal Reserve’s balancing act of supporting growth while addressing inflation. With President-elect Trump’s policy shifts on the horizon, the economic landscape for 2025 may face further challenges.
