–ISM Services Index at 54.1 in December Vs. 52.1 in November, Above Median Forecast 53.2
–ISM’s Miller: Fed Likely to Pause in Rate Cuts in Face of 2nd Straight Quarterly Growth in Services Sector, Creeping Costs
–Miller: Firms Concerned About Expected Drag from Trump Tariffs on Canadian Product Supply
By Max Sato
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, such as much shorter operation days during the yearend holiday season, re-stocking ahead of the Lunar New Year (Jan. 29 this year) and disruptions in winter weather for those two months.
The ISM services PMI posted declines from November to December every year in the last 10 years. When this pattern is corrected in the seasonally adjusted data series, the index tends to rise toward yearend. The change in new orders was 50-50 and employment was down in seven out of 10 in the same timeframe. The prices paid index rose from November to December, in seven out of the last 10 years, which means the key measure on costs was also boosted by seasonality.
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.
President-elect Donald Trump has threated to impose a 25% tariff on all goods from Mexico and Canada, and an additional 10% tariff on imports from China, all part of his drive to crack down on illegal drugs and immigration.
“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.
After a series of interest rate cuts from the Federal Reserve, Miller said, “It will probably make sense to do a pause and see what happens in Q1” given that the ISM services PMI showed the second quarterly rise and the prices paid index crept up in December.
At its latest meeting on Dec. 17-18, the Federal Open Market Committee decided in an 11 to 1 majority vote to lower the target range for the federal funds rate by 25 basis points (0.25 percentage point) to a range of 4.25% to 4.50%, as expected. The summary of economic projections shows that the median FOMC forecast for the fed funds target rate is a midpoint of 3.9% in 2025, up from 3.4% in the prior forecast. This implies two 25-basis point rate cuts for 2025, fewer than previously expected.
Among comments from the ISM survey, a company in the professional, scientific and technical services category said, “Inflation levels seem to be increasing, thus dimming hopes of interest rate cuts.”
The construction industry, which is sensitive to borrowing costs, also sees dark clouds over the horizon. “New residential construction remains hampered by interest rates and affordability issues,” a construction firm manager told the ISM.
“As projects can take two-plus years, budgeting is getting difficult, similar to 2021 and 2022, when supply chain disruptions caused chaos in pricing.”
“Preparations are underway to diversify supply in the anticipation for tariffs and the effect it will have on our business,” a firm from the accommodation and food services industry said. Well before the latest tariff threat came from Trump, hospitalities and construction firms had been shifting their purchases from China to Thailand, Vietnam and Mexico for several years from technical viewpoints.
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 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 inventories index stayed in contraction territory in December for the second month after three months in expansion, registering 49.4, an increase of 3.5 points from November’s figure of 45.9. By contrast, the inventory sentiment index fell 1.2 points to 53.4 from 54.6, although it was above 50 for the 20th consecutive month.