| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Index | 55.0 | 53.0 to 56.0 | 49.6 | 56.5 |
Highlights
The US service sector contracted after 30 months of growth in December, hit by sluggish new orders and employment, after picking up slightly in November on holiday season demand and at the initial stage of the government's new fiscal year that began in October, according to the latest survey by the Institute for Supply Management (ISM) released Friday.
The main index, which shows the directional change of economic activity, fell 6.9 percentage points to 49.6 in December, just below the baseline, after rising a sharp 2.1 points to 56.5 in November from October's 54.4. The composite index contracted for the first time since May 2020, when it registered 45.2. It came in weaker than the median economist forecast of 55.0.
The index stayed well above the recent low of 41.5 hit in April 2020 and 40.1 in March 2009, the lowest since the inception of the Services PMI in 2008. But it also remains well below the record high of 68.4 hit in November 2021.
Of the four sub-indexes that directly factor into the services PMI, three -- new orders, employment and supplier deliveries -- contracted in December.
The new orders index contracted in December for the first time since May 2020, falling a sharp 10.8 points to 45.2 from the November reading of 56.0. It was due to both slightly slower demand and in payback for previously high orders.
The business activity index also slumped 10 points to 54.7 from 64.7 in November, but it stayed above the breakeven point of 50, thanks to the remaining effects of holiday season demand.
"Business Survey Committee respondents indicated that supplier deliveries were faster in December, based on increased capacity and improved logistics," Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement."Employment contracted due to a combination of decreased hiring due to economic uncertainty and an inability to backfill open positions. The holiday season contributed to the continued growth in business activity, albeit at a slower rate."
He told reporters that the US services sector saw strong growth in 2022 and that it is too early to judge how it will perform in 2023 by just looking at a single month of soft data and things should pick up after a post-holiday season slowdown.
"I believe all the things are still in positive territory and I don't believe we will have a long-drawn contraction," Nieves predicted, adding that the drop in new orders was more of an"adjustment" to previously accelerated orders.
Last month, he told reporters that it would not be sustainable to operate at a high growth pace, as seen in the ISM service composite index in the high 50s and low 60s.
"Business is slower than usual," a firm from the agriculture, forestry, fishing and hunting category told the ISM survey."Seems to be a three- or four-month trend. We expect it to pick up after the first of the year."
"Residential new construction continues to be hindered by higher interest rates, slowing sales dramatically," a company in the construction industry said.
The employment index dropped 1.7 points to 49.8 in December, slipping back into contraction, after rebounding 2.4 points to 51.5 in November and falling 3.9 points to 49.1 in October.
There is a dichotomy in the services sector employment, Nieves said."Some companies are still struggling to backfill positions," he said. On the other hand, there was a large buildup in employment among information and technology firms during the pandemic,"but now there is an adjustment and there is a cutback," he explained.
Even with overall strength in the labor market, there are significant layoffs in the technology sector, he noted.
The latest US jobs data released Friday showed the labor market remains tight. Nonfarm payrolls rose an above-consensus 223,000 in December, although the prior two monthly gains were revised down by a combined 28,000 and the pace was slower than the 256,000 in November.
As global supply constraints continue easing and demand has slowed, the supplier deliveries index contracted in December, indicating faster performance. The index fell 5.3 points to 48.5 from 53.8 in November. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
Inflationary pressures are also easing. The prices index fell 2.4 points in December to 67.6 from 70.0 in November following a 2.0-point rise to 70.7 in October, which was the first increase in six months. The index is well below a record high of 84.6 hit in April 2022.
The inventories index contracted for the seventh consecutive month, falling 2.8 points to 45.1. The inventory sentiment index at 55.9, up 11.7 points from November's 44.2, returned to expansion after four straight months in contraction, indicating it is"too high."
"We're dealing with inflation, increasing labor costs, longer lead times and the higher education sector struggling to retain employees," an educational services provider told the ISM.
A firm from the real estate, rental and leasing industry said,"We are optimistic, although concerned, about continued inflation pressures, lead times that remain well above typical and supply chain issues that just won't go away."
The main index, which shows the directional change of economic activity, fell 6.9 percentage points to 49.6 in December, just below the baseline, after rising a sharp 2.1 points to 56.5 in November from October's 54.4. The composite index contracted for the first time since May 2020, when it registered 45.2. It came in weaker than the median economist forecast of 55.0.
The index stayed well above the recent low of 41.5 hit in April 2020 and 40.1 in March 2009, the lowest since the inception of the Services PMI in 2008. But it also remains well below the record high of 68.4 hit in November 2021.
Of the four sub-indexes that directly factor into the services PMI, three -- new orders, employment and supplier deliveries -- contracted in December.
The new orders index contracted in December for the first time since May 2020, falling a sharp 10.8 points to 45.2 from the November reading of 56.0. It was due to both slightly slower demand and in payback for previously high orders.
The business activity index also slumped 10 points to 54.7 from 64.7 in November, but it stayed above the breakeven point of 50, thanks to the remaining effects of holiday season demand.
"Business Survey Committee respondents indicated that supplier deliveries were faster in December, based on increased capacity and improved logistics," Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement."Employment contracted due to a combination of decreased hiring due to economic uncertainty and an inability to backfill open positions. The holiday season contributed to the continued growth in business activity, albeit at a slower rate."
He told reporters that the US services sector saw strong growth in 2022 and that it is too early to judge how it will perform in 2023 by just looking at a single month of soft data and things should pick up after a post-holiday season slowdown.
"I believe all the things are still in positive territory and I don't believe we will have a long-drawn contraction," Nieves predicted, adding that the drop in new orders was more of an"adjustment" to previously accelerated orders.
Last month, he told reporters that it would not be sustainable to operate at a high growth pace, as seen in the ISM service composite index in the high 50s and low 60s.
"Business is slower than usual," a firm from the agriculture, forestry, fishing and hunting category told the ISM survey."Seems to be a three- or four-month trend. We expect it to pick up after the first of the year."
"Residential new construction continues to be hindered by higher interest rates, slowing sales dramatically," a company in the construction industry said.
The employment index dropped 1.7 points to 49.8 in December, slipping back into contraction, after rebounding 2.4 points to 51.5 in November and falling 3.9 points to 49.1 in October.
There is a dichotomy in the services sector employment, Nieves said."Some companies are still struggling to backfill positions," he said. On the other hand, there was a large buildup in employment among information and technology firms during the pandemic,"but now there is an adjustment and there is a cutback," he explained.
Even with overall strength in the labor market, there are significant layoffs in the technology sector, he noted.
The latest US jobs data released Friday showed the labor market remains tight. Nonfarm payrolls rose an above-consensus 223,000 in December, although the prior two monthly gains were revised down by a combined 28,000 and the pace was slower than the 256,000 in November.
As global supply constraints continue easing and demand has slowed, the supplier deliveries index contracted in December, indicating faster performance. The index fell 5.3 points to 48.5 from 53.8 in November. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
Inflationary pressures are also easing. The prices index fell 2.4 points in December to 67.6 from 70.0 in November following a 2.0-point rise to 70.7 in October, which was the first increase in six months. The index is well below a record high of 84.6 hit in April 2022.
The inventories index contracted for the seventh consecutive month, falling 2.8 points to 45.1. The inventory sentiment index at 55.9, up 11.7 points from November's 44.2, returned to expansion after four straight months in contraction, indicating it is"too high."
"We're dealing with inflation, increasing labor costs, longer lead times and the higher education sector struggling to retain employees," an educational services provider told the ISM.
A firm from the real estate, rental and leasing industry said,"We are optimistic, although concerned, about continued inflation pressures, lead times that remain well above typical and supply chain issues that just won't go away."
Market Consensus Before Announcement
The ISM services index has been surprisingly solid month after month, beating expectations once again in November with a 56.5 score. Econoday's consensus for December is for another month of expansion at 55.0.
Definition
Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.
Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.
