By Lucia MutikaniWASHINGTON (Reuters) – Activity in the U.S. services sector picked up pace in December, while a sharp increase in prices for inputs signaled heightened inflation, in line with the Federal Reserve’s expectations for fewer interest rate cuts this year. The Institute for Supply Management (ISM) reported on Tuesday that its non-manufacturing purchasing managers index (PMI) rose to 54.1 last month from 52.1 in November, driven by robust demand. Economists surveyed by Reuters had anticipated the services PMI climbing to 53.3. A reading above 50 on the PMI scale indicates expansion in the services sector, which plays a substantial role in the economy. The ISM considers PMI readings above 49 as indicative of overall economic growth.
The PMI data complement other indicators, such as consumer spending, suggesting a solid economic performance in the fourth quarter. The ISM revealed last week that its manufacturing PMI reached a nine-month high in December. Business sentiment has improved following President-elect Donald Trump’s victory in November, fueled by expectations of tax cuts and a less restrictive regulatory environment. However, concerns linger regarding other policy proposals from the incoming administration, like higher tariffs on imports and increased deportations, which could fuel inflation and hamper growth.
The ISM survey showed a rise in new orders to 54.2 last month from 53.7 in November, and the business activity index surged to 58.2 from the previous month’s 53.7. With increasing demand, the cost of inputs also climbed. The survey’s prices paid measure for services inputs spiked to 64.4, hitting its highest level since February 2023, up from 58.2 in November. Progress towards lowering inflation to the Fed’s 2% target slowed in the second half of 2024 due to a resilient economy.
Last month, the Federal Reserve implemented a third consecutive rate cut, reducing its benchmark overnight interest rate to the 4.25%-4.50% range. The Fed’s projection now anticipates only two rate cuts this year, down from the four forecasted in September, acknowledging the robustness of the job market and the economy. In efforts to tame inflation, the Fed had increased its policy rate by 5.25 percentage points in 2022 and 2023.
The survey’s measure of services employment remained relatively steady at 51.4 in December, but its predictive value for services payrolls in the government’s key employment report has been inconsistent. Job growth likely slowed last month after the boost from the resolution of disruptions caused by hurricanes and factory strikes faded. According to a Reuters survey, nonfarm payrolls are expected to have expanded by 154,000 jobs in December following a surge of 227,000 in November, with the unemployment rate forecasted to hold steady at 4.2%. (Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
