For December, the Services Purchasing Managers’ Index (PMI) jumped to 54.4, up sharply from November’s 52.6. This increase tripled analysts’ expectations and indicates a very positive change in US service sector economic activity. Our 2023 report shows a modest rebound, underscoring the complexity of trends like greater employment access, lessening inflation, and more.
This trend accelerated in December with the New Orders Index rising to 57.9, from 52.9 in November. This increase is a positive sign, representing a much bigger demand for these valuable services. The Employment Index rapidly increased to 52.0, recovering from November’s 48.9 high mark. This jump reflects a huge positive change in conditions on the labor market. The Prices Paid Index fell to 64.3, a decrease from 65.4. This continued decline indicates that inflationary forces in the sector are starting to subside.
Service Sector Performance
The increase of the ISM Services PMI to 54.4 points is a sign that overall economic activity in the US service industry has strengthened marginally. Based on a survey of purchasing managers, a reading over 50 indicates expansion and a reading under 50 shows contraction. Even excluding all those new courier and messenger jobs, this increase indicates that the service sector—by far the largest sector of our economy overall—is on the right path.
The jump in the New Orders Index to 57.9 stands out in showing that businesses are seeing a boom in demand for their activity. This jump in new orders is critically important, as it tends to lead to new boosts in production and capital durable job gains in the sector. Such trends are essential for maintaining long-term economic growth and confidence among providers of the services.
In addition to new orders, the Employment Index’s rise to 52.0 marks a significant recovery from contraction levels experienced in November. This increase is clear evidence that private sector employers are beginning to add additional personnel. As a side benefit, that improved mobility will lead to increased productivity and an additional trillion dollars in economic growth.
Inflationary Trends
The Prices Paid Index is down to 64.3. This decrease is further evidence that inflation in service cost is beginning to cool. The 65.4 recorded in November has since fallen, bringing more good news for consumers and businesses alike. This large decline represents a marked deceleration in the pace of price increases for the broader service sector.
While inflation remains a concern for many sectors of the economy, this decline could signal a potential shift towards more stable pricing conditions in the future. From the perspective of the business community, this will be welcome news, indeed. It enables more robust long-term planning and budgeting, liberating them from the prospect of soaring costs.
Moreover, this easing of inflation aligns with broader economic trends observed in various sectors, potentially indicating that previous monetary policies aimed at controlling inflation are beginning to take effect.
Labor Market Recovery
This latter point speaks to the notable tightening in labor market conditions, which is perhaps the most positive takeaway from the ISM report. The rising Expansion Employment Index shows that service sector providers are becoming more confident about their business outlook in the months ahead. As hiring continues to increase, companies can more adequately position themselves to meet a surge of consumer demand.
Further, as the state’s unemployment improves, that can have a beneficial reinforcing effect within the economy itself. More employed individuals typically contribute to higher consumer spending, which can further bolster demand for services and stimulate additional hiring.
Yet the labor market remains a strong point in the overall recovery, reflecting real progress. This is increasingly true after having suffered tremendous setbacks during previous recessions. And indicators in the extensive US service sector point toward a process of stabilization and return to growth.