January 7, 2025

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of service sector firms.  The business activity index rose 4.5 points in December to 58.2 after having declined 3.5 points in November.  We tend to focus on the business activity component as a measure of “production” because it seems to track better with the pace of economic activity.  It has softened during the course of the past year, but this index has jumped sharply in the past four months.

The composite index rose 2.0 points in December to 54.1 after  having fallen 3.5 points in November.   According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, “The Services PMI^® in December was boosted primarily by strength in the Business Activity and Supplier Deliveries indexes. Many industries noted that end-of-year and seasonal factors were helping drive business activity or impact inventory management. 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. There was general optimism expressed across many industries, but tariff concerns elicited the most panelist comments.”

It appears that activity in the service sector climbed sharply in between September and the end of the year.  At its current level the ISM group says that is consistent with 1.7% growth in GDP.  After climbing 2.8% in the third quarter we expect GDP growth in the fourth quarter of 2.5% and 2.9% GDP growth in 2025.

Comments from respondents include:  

• “Preparations are underway to diversify supply in the anticipation for tariffs and the effect it will have on our business.” [Accommodation & Food Services]
• “New residential construction remains hampered by interest rates and affordability issues. Tariff threats from incoming administration have been making suppliers reluctant to hold pricing for more than one year. As projects can take two-plus years, budgeting is getting difficult, similar to 2021 and 2022, when supply chain disruptions caused chaos in pricing.” [Construction]
• “Moving work offshore to save cost.” [Finance & Insurance]
• “Continued shortages of IV solutions have resulted in some cases being cancelled and/or delayed.” [Health Care & Social Assistance]
• “Generally optimistic that the incoming administration will positively affect regulatory, tax and energy policies that will spur economic improvement. We are concerned about tariff activity and are hoping for the best.” [Information]
• “Inflation levels seem to be increasing, thus dimming hopes of interest rate cuts.” [Professional, Scientific & Technical Services]
• “Overall activity slightly higher than planned.” [Retail Trade]
• “Seems to be a lot of uncertainty about tariffs and purchasing decisions. A lot of wait and see.” [Transportation & Warehousing]
• “General business conditions are still going well. The end of (2024) is approaching, so end-of-year preparations are in full swing.” [Utilities]
• “Customers are slowing down, and they are cutting back their inventories in preparation for the end of the year, so our sales are slowing down.” [Wholesale Trade]

The orders component rose 0.5 points in December to 54.2 after having declined 3.7 points in November. The September level was the highest level for this component since February 2023.  Comments from respondents include:  “Fiscal year restarted” and “Mortgage rates have not fallen as anticipated; buyers are waiting on the sidelines.”

The ISM non-manufacturing index for employment declined 0.1 point to 51.4 after having declined 1.5 points in November.   Nine industries reported an increase in employment in December   Comments from respondents include “Staging for future growth” and “Hiring freeze.”

The suppler deliveries component rose 3.0 points in December to 52.5 after  having fallen 6.9 points in November.  This component is reversed in the sense that a reading above 50 percent indicates slower deliveries to service sector firms, while a reading below 50 percent indicates faster deliveries. Thus, firms reported slower delivery times in December versus slightly faster delivery times in November.  Comments from respondents include:  “Continue to see suppliers struggle with delivery of products, which has been attributed largely to resource constraints and productivity in shops (high workload and quality issues)” and “Ocean freight is starting to have a backlog of container shipments.”

Finally, the price component jumped 6.2 points in December to 64.4 after having risen 0.1 point in November.  It turns out that the December reading is the first above 60 since January 2024.   Fifteen of 18 service sector industries reported an increase in prices paid during the month.

The manufacturing sector of the economy has contracted since November of 2022 as inflation has continued to climb at a much faster than desired pace.  However, the service sector continues to expand at a respectable pace.  We saw GDP growth of 2.8% in the third quarter and we expect 2.5% GDP growth in the fourth quarter and anticipate 2.9% GDP growth in 2025.

.Stephen Slifer

NumberNomics

Charleston, SC