Report On Business® Roundup: December Services PMI®
Conventional wisdom suggests that the Services ISM® Report On Business® data would get a boost in December thanks to holiday peak season, but history indicates the opposite — a lower month-over-month composite index reading in seven of the last 10 years.
That history includes a surprise contraction in 2022. A year ago, the December numbers disappointed, especially an alarming decrease in the Employment Index. Given those trends, the Services PMI® registering 54.1 percent in December, a 2-percentage point increase over the previous month that was powered by all four key subindexes in expansion, was most encouraging.
“Even though the total number of industries in expansion fell (nine, compared to 14 in November), there were significant improvements in a key industry like Real Estate, Rental & Leasing, even though it stayed in contraction,” Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee, told a conference call of reporters on Tuesday.
Quite a bit of tariff angst in December's ISM services index pic.twitter.com/6kILcwVAnp
— RenMac: Renaissance Macro Research (@RenMacLLC) January 7, 2025
Miller added that the average PMI® reading during the fourth quarter was 54.1 percent. “This is the second quarter in a row the average went up, which should provide confidence that the services sector is on sound footing,” he said.
Like with ISM’s Manufacturing report issued last week, a plurality of panelists’ comments were on likely tariff increases by the incoming Trump administration; there was also concern about prices growth and the potential response of the U.S. Federal Reserve (Fed). Those worries were manifested in a Prices Index reading of 64.4 percent, a 6.2-percentage point increase and the highest reading since February 2023 (65.1 percent).
“I don’t see anything one way or the other that tells me this will be a sustained increase in prices,” Miller said. However, he added that it could give the Fed, which cut rates three times in the second half of 2025, reason to tap the brakes: “(The index reading) could give reason to do a pause and see what happens in the first quarter,” he said.
That could impact the Employment Index, which as showed resiliency in recent months and remained in expansion territory at 51.4 percent. If interest-rate cuts are pause, Miller said, that could limit capital investments in productivity improving technologies, leaving companies to fill that gap through hiring workers.
The federal Job Openings and Labor Turnover Survey (JOLTS) report on Tuesday revealed a more-than-expected 8.1 million job openings in November. “A number of our survey respondents say they are continuing to increase hiring, and the strength of the services sector over the last three months suggests that shouldn’t slow down,” Miller said. “The ability to hire people is better than it was a few months ago.”
The Business Activity Index increased 4.5 percentage points to 58.2 percent. While some panelists indicated a desire to get ahead of potential tariffs and anxiety about a potential strike at ports on the East and Gulf coasts, inventory data didn’t suggest that sentiment was widespread.
The prices index of the ISM services survey was ugly today, but don't get overexcited. The index is pretty volatile and often swings up and down without this ever showing up in the inflation numbers. We had a similar scare last January that ended up being a big fat nothing. pic.twitter.com/mPA9QAii8H
— Oliver Allen (@ollyallenecon) January 7, 2025
While the Inventories Index moved up 3.5 percentage points to 49.4 percent, the Inventory Sentiment Index decreased to 53.4 percent. While a lot of buying “was clearly motivated by risk management,” Miller said, much of it was likely typical end-of-year activity.
Another historical trend with the Services ISM® Report On Business® is a post-holidays lull. However, the PMI® bucked that trend with a strong reading in January 2024, and while Miller said the composite index might go down, the encouraging December numbers indicated a solid foundation for the sector.
“The big thing is what the new administration brings in terms of tax relief (and) potential tariff impacts,” Miller said. “The results will be important in terms of profitability and performance in the services industry.”
The Report On Business® roundup:
Bloomberg: U.S. Services Index Climbs, Price Gauge Hits Highest Since 2023. “The acceleration in the (Prices Index) comes as Federal Reserve policymakers adopt a more cautious approach to lowering interest rates. Resilient demand, illustrated by the pickup in business activity and stronger orders, adds to concerns that inflation will remain stubborn.”
CNBC: JOLTS Data Surges to 8 million, the Highest Level Since May ’24. “(The Services PMI) was better than expectations,” analyst Rick Santelli said. He added, “(The Prices Index) is moving in the wrong direction: 64.4 percent, well above the 57 percent we were expected and the 58.2 percent in the rear-view mirror (November).”
Mace News: Services Sector Expands for Sixth Straight Month in December on Robust Business Activity, With Boost from Seasonality, Preparation for Possible Trump Tariffs. “(A)s seen in the ISM Manufacturing survey, the months of December and January reflect statistical adjustments made to correct month-to-month surges or plunges caused by seasonal factors, such as much shorter operation days during the year-end holiday season, re-stocking ahead of the Lunar New Year (January 29 this year) and disruptions in winter weather for those two months.”
MarketWatch: ‘Inflation Levels Seem To Be Increasing’ — Businesses Worried About Tariffs and Rising Prices. “Economists polled by The Wall Street Journal had forecast an ISM reading of 53.4 percent in December. Companies are eager for tax cuts and a rollback in regulations promised by President-elect Donald Trump, but they are worried about higher costs stemming from stiff tariffs, the ISM survey found.”
Maybe 1 cut between now and July?
— Mike Zaccardi, CFA, CMT 🍖 (@MikeZaccardi) January 7, 2025
Rates jump post JOLTS and ISM Services pic.twitter.com/OI4xju827o
Reuters: U.S. Service Sector Growth Picks Up; Input Prices Gauge Highest in Nearly Two Years. “U.S. Service Sector Growth Picks Up; Input Prices Gauge Highest in Nearly Two Years. The PMI® added to so-called hard data, including consumer spending, that suggested solid economic performance in the fourth quarter. ISM said last week that its Manufacturing PMI® increased to a nine-month high in December.”
The Wall Street Journal: U.S. Services Sector Picks Up Pace Ahead of Trump Inauguration But Inflation Fears Linger. “Most of the categories used to gauge activity in services — which covers a gamut of industries, from financial services to education and hospitality — improved in December compared with a month earlier. Production grew notably, while new orders also rose a little, suggesting robust demand.”
In case you missed last week’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 Thursday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/Ilkermetinkursova)