The U.S. services sector expanded for a sixth straight month in December, led by robust business activity ahead of the New Year and possible stiff tariffs on imports from key suppliers Canada and Mexico but the overall purchasing managers index was also boosted by seasonal adjustments and firms are concerned about higher costs, data from the Institute for Supply Management showed. The ISM index, which shows the directional change of economic activity, rose 2.0 percentage points to 54.1, above its 12-month moving average of 52.5, after losing 3.9 points to a three-month low of 52.1 in November from a 27-month high of 56.0 in October. It was also much higher than the consensus forecast of 53.2.

"Many industries noted that end-of-year and seasonal factors were helping drive business activity or impact inventory management," Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement."Some of the increased business activity seems to have been driven by preparation for demand in the new year, or risk management for impacts from ports strikes and potential tariffs."

Miller told reporters that second consecutive average quarterly gain in the overall index"gives me confidence that we are back on sound footing in the services sector." The PMI in the October-December quarter rose 1.5 points to 54.1 after rising 1.9 points to 52.6 in July-September and falling 1.8 points to 50.7 in April-June. However, as 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. The ISM services PMI posted declines from November to December every year in the last 10 years. When this pattern is corrected in the seasonal adjusted data series, the index tends to rise toward yearend.

Miller said he is not so concerned about a rise in inventories as inventory sentiment was down in December while many firms in the latest survey expressed concerns over rising costs and the expected negative impact that higher tariffs would have on their costs, particularly arising from purchases of farm products from Canada."Suppliers are being proactive in passing forward increases in pricing year over year in anticipation of tariff impacts," Miller said, based on comments from supply managers. There is no data to confirm the increase in costs is sustained as a trend but it is"concerning," he added.

Of the four sub-indexes that directly factor into the services PMI, the business activity/production index registered a six-month high of 58.2 in December, 4.5 points higher than the 53.7 recorded in November, finishing the year with its third-highest reading for 2024. The new orders index recorded a reading of 54.2, up 0.5 point from November's figure of 53.7. Both indicate a sixth consecutive month of expansion. The employment index remained in expansion territory for the fifth time in six months; the reading of 51.4 is a 0.1-point decrease compared to the 51.5 recorded in November. The supplier deliveries index the only ISM index that is inversed stood at 52.5, 3.0 points higher than 49.5 in November. The index returned to expansion territory - indicating slower supplier delivery performance - to split the year, with six months each in expansion and contraction.

Among other subindexes, the prices paid index was at 64.4 in December, a 6.2-point increase from November's reading of 58.2, hitting the highest since 65.1 in February 2023. The surge in costs was seen in real estate, rental and leasing, finance and insurance, and agriculture, forestry, fishing and hunting. The index was well above its 12-month moving average stood at 58.7, which was up from 58.0 in the previous three months.

The services economy continues to tick along nicely despite a miserable showing for its sidekick, manufacturing. The ISM services index is seen rising to 53.2 in December from 52.1 in November.

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.