–ISM Services Index at 3-Month Low of 52.1 vs. 56.0 in October, Well Below Median Forecast 55.5
–ISM’s Miller: Trump Tariff Complications Not Accelerating Ongoing Move Away from China
–Miller: Higher Costs of Sourcing from Mexico Likely to Be Resolved Via North American Trade Pact As in Past
By Max Sato
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 the Federal Reserve’s gradual move to unwind its tight monetary policy. The Federal Open Market Committee decided to lower the target range for the federal funds rate by 50 basis points (0.5 percentage point) to a range of 4.75% to 5% in September and to trim it by a further 25 basis points to the current range of 4.50% to 4.75% in November.
“Federal Reserve interest rate cuts have not had the desired effect on mortgage rates yet,” a construction firm told the ISM. “With election results mostly determined, expansion of residential construction is anticipated, but the unknown effect of tariffs clouds the future.”
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 told reporters that hospitality and construction firms have already been shifting their purchases from China to Thailand, Vietnam and Mexico for several years.
Prospective Trump tariff complications “are not accelerating” the ongoing move away from China and higher cost issues of sourcing from Mexico are likely to be resolved through the existing North American trade agreement as seen during the previous Trump administration, Miller said.
Yet, services industries are concerned about higher import costs under the incoming administration. “We have concern after the presidential election that tariffs will affect prices for electronics and components in 2025,” an information service provider said.
A company from the professional, scientific and technical services category predicted: “Election results and the potential tariff changes would impact inventory and lead to higher prices in the hospital supply chain.”
On the Trump administration, a firm in the transport and warehousing said it is “holding capital projects now until the cabinet is complete and we know how federal funds will be dispersed going forward.”
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. Comments from respondents include: “Actively filling open positions” and “Hiring freeze in place; not backfilling positions as people retire or leave the company.”
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 index was just above its 12-month moving average stood at 58.0, which was unchanged for two months in a row.