On the heels of Friday’s blowout jobs report, the ISM Services Index improved to 53.4 in January from a downwardly revised reading of 50.5 in December. This was above the consensus forecast of 52.0 and the strongest print since September 2023. The new orders index, a proxy of future demand, rose 2.2 points to 55.0, while new export orders increased 5.7 points to 56.1. Consistent with the strong January jobs report, the employment index improved 6.7 points to 50.5 after contracting in December. This is the strongest reading since September and places the index just above the six-month average of 50.3. The business activity index, which is comparable to the ISM manufacturing output gauge, was unchanged at a strong 55.8. The inventory sentiment index rose 4.0 points to 59.9, suggesting service providers view inventories as too high relative to demand. The one concerning development in the report was the prices paid index climbing 7.3 points to the highest since February 2023. This is the biggest jump since 2012 and points to rapidly rising costs for service providers.

Bottom line: All in all, this is a strong report that points to continued expansion in the U.S. service sector. The Fed will also take note of the sharp rise in the prices paid index as it determines the timing of its first rate cut.

Table 1 - United States — ISM Services PMI

(percent reporting)

Source: BMO Economics, Haver Analytics

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