Business activity in the U.S. services sector expanded for a fifth straight month in November but marked a sharper-than-expected deceleration as President-elect Donald Trump's tariff threats are stirring fears of higher import costs and Federal Reserve's slow move to unwind its restrictive policy is hampering a quicker fall in mortgage rates, data from the Institute for Supply Management showed.

The ISM index, which shows the directional change of economic activity, slipped back a sharp 3.9 points to a three-month low of 52.1, just below its 12-month moving average of 52.2, after rising 1.1 points to a more than two-year high of 56.0 in October. It was much lower than the consensus forecast of 55.5. A milder pullback had been anticipated as the surprise uptick in October was partly caused by slower supply deliveries in the wake of powerful hurricanes.

"The decrease in the services PMI in November was driven by decreases in each of the four directly impacting subindexes: business activity, new orders, employment and supplier deliveries," Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement."However, 14 industries reported business activity growth, and 13 indicated new orders expansion; both figures are improvements compared to October."

"Generally, respondents' comments were neutral to positive, and both positive and negative impacts were attributed to seasonality," he said."Not surprisingly, election ramifications and tariffs were mentioned often, with cautionary outlooks related to the potential impact on respondents' specific industries."

Pre-holiday seasonal factors worked positively for the retail and transport industries, which indicates"overall good signs for consumer sentiment," Miller told reporters, adding that utilities saw both positive and negative effects of seasonal factors. Miller noted that industries that are sensitive to interest rate changes utilities, real estate and construction are not yet seeing any positive impact of Federal Reserve's gradual move to unwind its tight monetary policy.

Trump said last week that he would impose a 25% tariff on all goods from Mexico and Canada as soon as he takes office on Jan. 20, and that he would also slap an additional 10% tariff on imports from China, all part of his drive to crack down on illegal drugs and immigration.

Asked how the U.S. services sector is trying to bypass China as its procurement source, Miller replied that hospitalities and construction firms have already been shifting their purchases from China to Thailand, Vietnam and Mexico for several years from technical viewpoints. Trump tariff complications"are not accelerating" the ongoing move away from China and higher cost issues of sourcing from Mexico is likely to be resolved through the existing North American trade agreement as seen during the previous Trump administration, Miiller said.

The services sector continues to outperform the manufacturing industries, which showed contraction for the eighth straight month in November as firms remained reluctant to invest amid uncertainties over Trump's hefty tariff threats on America's close trading partners but the pace of decline eased slightly on optimism that a Republican administration will be business friendly.

Of the four sub-indexes that directly factor into the services PMI, the business activity/production index fell 3.5 points to 53.7 in November after slipping 2.7 points to 57.2 in October and rising 6.6 points to 59.9 in September. The new orders index recorded 53.7, also down 3.7 points from 57.4 following a 2.0-point drop. Both indexes were in expansion (above 50) for the fifth consecutive month after contracting in June 2024 for just the second time since the pandemic-hit May 2020.

The employment index dipped 1.5 points to 51.5 after surging 4.9 points to 53.0 the previous month for the highest since 54.1 in August 2023. It was well above its 12-month moving average of 48.7, confirming resilient labor market conditions seen in jobs data. It now showed expansion for the fifth time this year.

The supplier deliveries index the only ISM index that is inversed stood at 49.5, down 6.9 points, after rising 4.3 points to 56.4 in October. It is in contraction territory for the sixth time this year, slipping below the key level of 50 and thus indicating faster deliveries. Supply chains have generally recovered from the long lead times during the pandemic.

Among other subindexes, the prices paid index edged up 0.1 point to 58.2 after dipping 1.3 points to 58.1 in October and rising 2.1 points to 59.4 in September.

The services economy continues to outperform manufacturing with the ISM services index expected at 55.5 in November after rising to a robust 56.0 in October from 54.9 in September.

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.