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Report On Business® Roundup: December Services PMI®

January 05, 2024
By Dan Zeiger

One of the biggest conveniences of the ISM® Report On Business® is that a surprise composite index reading can be quickly explained by the subindex data — and that dynamic was perhaps no more evident than on Friday.

When the federal jobs report is released, it’s usually the biggest economic data of that day. However, the Services PMI® numbers for December, as Bloomberg TV host Katie Greifeld put it, “definitely stole the spotlight from the jobs report” for a part of the morning.

The consternation among investors and the economic community wasn’t so much about the composite index reading of 50.6 percent, though it didn’t meet expectations. It didn’t take long to find out why the Services PMI® missed: The Employment Index dipped 7.4 percentage points to 43.3 percent, its lowest reading since July 2020 (43 percent) and at odds with a federal report that showed a higher-than-expected 216,000 jobs added in December.

In the wake of that unveiling, Treasury yields, which had climbed after the federal report, went into retreat. Analysts pointed out how infrequently the Services Employment Index has fallen that low, and there was more indigestion about the impact on the U.S. Federal Reserve (Fed), with markets and companies eager for interest rate reductions.

“It’s clear that the question of the day is how the Employment Index (doesn’t) match up with the federal jobs report,” Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® Services Business Survey Committee, told a conference call of reporters on Friday. “It’s important to note that the index measures change month over month, with our respondents asked if conditions are better, worse or the same.

“As a result, companies could be adding jobs month over month, just not at the same level as the previous month.”

Business Survey Committee respondents indicate that 9.6 percent of companies had higher head counts (down from 14.3 percent in November), with 23.2 percent lower (up from 13.8 percent). Two thirds (67.2 percent) of companies had no change. It’s possible for sector-wide hiring to increase compared to the previous month, even with fewer companies reporting higher head counts.

There are a lot of moving parts with services sector employment, Nieves said, as well as forces impacting it. Seasonality is an issue in December; while many companies ramp up hiring heading into peak season, activity slows during and after the holidays. “We don’t see a pickup in recruitment and hiring usually until mid-January, so this is traditional,” he said.

Meanwhile, economic and geopolitical concerns continue to weigh on many companies, and the most common response is to control their biggest variable expense — labor costs. Wrote a survey respondent in Professional, Scientific & Technical Services, “Hiring of direct employees, consultants and contract workers remains flat across most industries as the holiday season is in full swing and economic concerns persist. Companies are taking a wait-and-see approach to increasing labor costs as they continue to try to do more work with less people.”

In the bigger picture, Nieves added, context is critical. In December 2022, the Services PMI® unexpectedly went into contraction territory, only to rebound the following month. And the December data is not out of line with Business Survey Committee sentiment in ISM’s Semiannual Economic Forecast released on December 15, in which services executives project growth in 2024, despite a pullback in the first half of the year.

“So, it’s not like we were going to go gangbusters; conditions are consistent with what our respondents indicated in December,” Nieves said. “Now and going forward in 2024, critical things like profit margins will grow, but we’ll see contraction in some of measurements for a time. But overall, this year should be a continuing path of growth for the services sector.”

The Report On Business® roundup:

Bloomberg: U.S. Services Growth Slows With Employment Shrinking Most Since 2020. “The December reading was lower than all estimates in a Bloomberg survey of economists. A sustained slowdown in services would raise concerns about the risk of a broader cooling of the U.S. economy. … The ISM report also showed a gauge of new orders placed with service providers slipped to a three-month low, suggesting a more tempered outlook for demand.”

CNBC: December’s ISM Services Index Comes in Below Expectations. “The headline index: 50.6 (percent); that is indeed a miss,” analyst Rick Santelli said. “We were looking for the number to be at 52.5 (percent). ... If we look at (the Employment Index), and we just had that (federal jobs) report today, 43.3 (percent), that is a big miss that goes into contraction territory. Wayback machine: That’s the weakest number since July 2020.”

Mace News: Services Sector Expands for 12th Month in December but Growth Slows on Seasonal Drop in Hiring, Economic Uncertainty, Geopolitical Risks. “(T)he Inventories Index fell 5.8 points to 49.6 percent in December. ... The latest decline followed a rise in November, which was due to a seasonal buildup for the holiday season and higher purchases of personal protective equipment at the start of the flu season.”

MarketWatch: U.S. Economy Stumbles at Year’s End, ISM Finds. “The economy slowed in the final quarter of 2023, but it's still expanding at a fairly healthy pace despite sharply higher interest rates. What’s more, the prospect of a reduction in rates later in the year if inflation continues to taper off could also give support to the economy and possibly stave off a recession.”

Reuters: U.S. Service Sector Slows in December as Employment Plummets. “(I)nflation has been cooling, with prices as measured by the personal consumption expenditures price index falling on a monthly basis in November for the first time in more than 3½ years. That, together with easing labor market conditions, has led financial markets to expect that the Federal Reserve will start cutting interest rates as soon as March.”

The Wall Street Journal: Traders Quickly Revise Bets On Fed Rate Cuts. “(J)ust a half an hour into Friday trading, (the ISM Employment Index sent) investors back into stocks and bonds and prompting a modest rally. This is important because the expectations for a modest slowdown are well baked into the market. Investors came into the year optimistic that a cooling economy paved the path for the Federal Reserve to cut interest rates roughly six times this year starting as early as March.”

In case you missed Wednesday’s Report On Business® Roundup on the release of the December Manufacturing PMI®, you can read it here. The Hospital PMI® will be released on Tuesday. For the most up-to-date content on the three indexes under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.

(Photo credit: Getty Images/Leo Patrizi)

About the Author

Dan Zeiger

About the Author

Dan Zeiger is Senior Copy Editor/Writer for Inside Supply Management® magazine, covering topics, trends and issues relating to supply chain management.