Business activity in the US services sector managed to stay in positive territory for the 12th straight month in December but the key index unexpectedly slumped in light of a seasonal drop in employment and slower new orders amid uncertainty over economic growth and geopolitical risks, 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 2.1 percentage points to a seven-month low of 50.6 in December after rising 0.9 point to 52.7 in November and falling 1.8 points to 51.8 in October. The index surged 6.0 points to 55.2 in January 2023 to recover much of the 6.3-point plunge to 49.2 in December 2022, which was the first contraction since May 2020 (45.4).

The index came in below the median economist forecast of 52.7 and the year's average of 52.8. It is well above the recent low of 41.7 hit in April 2020 and 40.1 in March 2009, which is the lowest since the inception of the Services PMI in 2008. But it also remains well below the record high of 68.4 reached in November 2021.

"The services sector had a pullback in the rate of growth in December, attributed to the decrease in the rate of growth for new orders and contraction in employment," Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement."Respondents' comments vary by both company and industry. There are concerns related to economic uncertainty, geopolitical events and labor constraints."

Of the four sub-indexes that directly factor into the services PMI, growth in business activity continued at 56.6, new orders slowed 2.7 points to 52.8, supply deliveries at 49.5 were faster for the third straight month on improved supply chains, but it was employment conditions that moved the most, plunging 7.4 points to 43.3 for the lowest reading since July 2020 after improving slightly in the prior month.

Yet Nieves told reporters that"the employment picture has not changed all that much," adding that service providers tend to secure workers before the busy holiday season and that there's not much hiring activity from Christmas to the New Year. Firms are expected to resume hiring in mid-January, he said.

Last month, he told reporters that the labor market conditions remained a"mixed bag," with construction firms and in-person service providers finding it hard to find workers.

In addition to the seasonal factor, comments from respondents in the December report showed uncertain growth prospects are keeping some firms cautious about hiring."Layoffs have increased in the professional services and staffing industries over the past several months as companies try to reduce cost amid the climate of economic uncertainty and decreasing customer demand," a surveyed firm told the ISM.

Looking ahead, Nieves said,"Overall, 2024 should continue on the path of growth for the services sector."

The US economy is expected to continue improving in 2024 on expectations that it will avoid recession and prices and borrowing costs will ease, according to the ISM's twice-annual survey released on Dec. 15. At the time, Nieves said the service sector's projection of a 0.8 percent increase in employment is"slightly concerning" after a 0.3 percent rise since May and a 1.9 percent gain for all of 2023.

Since then, Nieves said, the only major additional information that has emerged is the prospect for interest rate cuts by the Federal Reserve, which left its policy rate unchanged for the third straight meeting on Dec. 12-13. The real-estate and leasing industries are expected to benefit from lower borrowing costs as they were the first ones to suffer from rapid Fed tightening in 2022.

ISM services are expected to hold steady at 52.7 in December from 52.7 in November which extended a nine-month run of mid-to-low 50s.

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.

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.