Business activity in the US services sector stayed in positive territory for the 13th straight month in January with the key index rebounding more than expected following an unexpected slump the previous month, thanks to higher new orders backed by funding for the new fiscal year and resumed hiring after the holiday season.

But the January report also showed respondents remained concerned about the economy amid lingering cost pressures and geopolitical risks. Supply deliveries were delayed by bad weather in some US regions, the impact of attacks in the Red Sea, which prompted shipping firms to avoid the Suez Canal in Egypt, as well as congestion at the drought-hit Panama Canal. These factors are also boosting shipping costs.

The main index, which shows the directional change of economic activity, rose 2.9 percentage points to a four-month high of 53.4 in January after falling 2.0 points to a 50.5 (revised down from 50.6) in December. The ISM's annual revisions to seasonal factors resulted in changes to recent numbers.

The index came in above the median economist forecast of 52.1. It is well above the recent lows of 41.7 hit in April 2020 but it also remains well below the record high of 67.1 reached in November 2021.

"The overall growth rate increase in January is attributable to faster growth of the new orders, employment and supplier deliveries indexes," Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement."The majority of respondents indicate that business is steady."

"They are optimistic about the economy due to the potential impact of interest rate cuts; however, they are cautious due to inflation, associated cost pressures and ongoing geopolitical conflicts," he said.

Last month, Nieves told reporters that hiring activity by service providers was expected to resume in mid-January after a seasonal slowdown as they tend to secure workers before the busy holiday season.

Of the four sub-indexes that directly factor into the services PMI, growth in business activity was steady at 55.8, new orders rebounded 2.2 points to 55.0, employment surged 6.7 points to 50.5 recovering nearly all of the sharp drop in the prior month, and supply deliveries slowed for the first time in fourths. Shipping delays caused by water shortages at the Panama Canal are more serious than the impact of attacks on vessels in the Red Sea, Nieves said.

In other details, the prices paid index surged 7.3 points to 64.0 in January after dipping 0.9 point to 56.7 in December, indicating higher cost pressures. The index remains well below its record high of 83.8 hit in March 2022. The resumed increase in cost pressures is concerning, Nieves said, adding that he wants to see the prices index fall back from the 60s to the 50s range.

ISM services are expected to rise solidly in January to 52.1 versus 50.6 in December which was more than 2 points lower than expected and included sharp slowing in new orders and a plunge and contraction for employment.

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.