Activity in the U.S. service sector decelerated in December with the ISM Services Index slipping to 50.6 from 52.7 in November. This is the weakest reading since May 2023 and is barely above the break-even level of 50.0. Nonetheless, service sector activity has expanded for 12 consecutive months despite high interest rates and still-elevated inflation. The employment gauge fell 7.4 points to 43.3 – the lowest level since July 2020 – pointing to sharply slower service sector job growth or even losses in the near term. New orders slid to a three-month low pointing to weaker demand, while new export orders dropped 3.2 points to 50.4. On a brighter note, the business activity index, which is analogous to the ISM factory output index, rose for the second straight month and is firmly in-line with the six-month average of 56.5. Meanwhile, the slowdown in service sector activity pushed the prices paid index down 0.9 points to a five-month low of 57.4, signifying costs are still increasing but at a slower rate.

Bottom line: The U.S. service sector has now expanded for 12 months in a row, but December’s reading is the second weakest of the year and suggests activity is close to stagnating. Moreover, the employment gauge fell to the lowest level in more than three years, pointing to a loss of momentum in the labor market. The rapid rate increases by the Fed might be starting to bite the less interest sensitive service sector.

Table 1 - United States — ISM Services PMI

(percent reporting)

Source: BMO Economics, Haver Analytics

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