February 5, 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 fell 3.5 points in January to 54.5 after having risen 4.3 points in December.  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 been bouncy in recent months but still shows solid growth in the service sector.

The composite index declined 1.2 points in January to 52.8 after having risen 1.9 points in December.   According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, “January was the second month in a row with all four subindexes that directly factor into the Services PMI^® — Business Activity, New Orders, Employment and Supplier Deliveries — in expansion territory. Slower growth in the Business Activity and New Orders indexes led to the lower composite index reading. Poor weather conditions were highlighted by many respondents as impacting business levels and production. Like last month, many panelists also mentioned preparations or concerns related to potential U.S. government tariff actions; however, there was little mention of current business impacts as a result.”

At its current level the ISM group says that is consistent with 1.4% growth in GDP.  After climbing 2.3% in the fourth quarter we expect to see 3.0% GDP growth in 2025.

Comments from respondents include:

• “Expecting considerable new projects to move to execution by second quarter in the energy market within the U.S.” [Construction]
• “Business conditions seem to be stable for us at this time.” [Educational Services]
• “Seeing letters announcing higher pricing from suppliers for 2025. Relying more on analytics to find the lowest impact on cost while keeping the quality high.” [Health Care & Social Assistance]
• “The paper market is starting to tighten up on the groundwood grades. All the North American mills are pushing dates into late February. It’s not causing any shortages yet, but it’s the first time in over a year that dates are moving out.” [Information]
• “Some apprehension exists with stakeholders and suppliers with government changes and potential tariff burdens.” [Management of Companies & Support Services]
• “The threat of tariffs is causing prices to rise. The threat of unstable international markets is resulting in shortages for various materials.” [Professional, Scientific & Technical Services]
• “Concern going forward is the cost of materials and project work, if any tariffs go into effect.” [Real Estate, Rental & Leasing]
• “Holiday sales not as robust as hoped for. Will need to adjust future planning.” [Retail Trade]
• “The employment market is softening as we are seeing less natural turn and getting more and better-qualified applicants. Also, requests for our services have continued to increase.” [Transportation & Warehousing]
• “Business is picking up but still slower than expected for January. We have had a lot of warehouse closures due to weather.” [Wholesale Trade]

The orders component declined 3.1 points in January to 51.3 after having risen 0.7 points in December. The January level was the lowest level for this component since June 2024.  Comments from respondents include:  “Bid level is the highest level in over five years” and “High interest rates and inflation.”

The ISM non-manufacturing index for employment rose 1.0 point in January to 52.3 after having declined 0.2 point in December.   This is the fourth month in a row that employment in the service sector rose.  Six industries reported an increase in employment in January   Comments from respondents include ““Human resources department working aggressively to fill open positions” and “Belt tightening due to slowing consumer demand.”

The suppler deliveries component rose 0.5 point in January to 53.0 after having risen 3.0 points in December.  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 January for the second month in a row.   Comments from respondents include: “Weather delays and lack of availability of trucking on the East Coast have slowed down delivery times” and “Lunar New Year rush.”

Finally, the price component fell 4.0 points in January to 60.4 after having jumped 6.2 points in December.  It turns out that the December and January readings are the first two 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 contracted every month from November 2022 until January 2025.  The service sector continues to expand at a respectable pace.  We saw GDP growth of 2.3% in the fourth quarter and anticipate 3.0% GDP growth in 2025.

.Stephen Slifer

NumberNomics

Charleston, SC