US Flash Services PMI slows in December last month

December data pointed to another marginal increase in US private sector output, as rising business activity across the services economy helped offset the accelerating slowdown in manufacturing output.

However, total new orders fell for the first time in 13 months amid widespread reports of weaker business and consumer spending patterns.

A combination of weaker demand, higher hiring costs, and shrinking margins contributed to a further decline in the number of private sector workers at the end of 2024.The latest decline in workforce numbers was the sharpest since January 2021. The UK’s seasonally adjusted global PMI came in at 50.5 in December.

This was unchanged from a 13-month low in November and only pointed to marginal expansion in private sector output. Moreover, the rate of business expansion remained much weaker than in the first half of the year (mean index reading 53.0).

Mixed trends were recorded in the manufacturing and services sectors in December. The first sector recorded a second consecutive monthly decline in production volumes (45.7), with the rate of decline accelerating to its fastest level since January. By contrast, the latest survey indicated a modest rise in services sector output (51.4) and growth slightly uplifted from a 13-month low in November.

Anecdotal evidence pointed to higher transportation costs and raw material prices, as well as higher recruitment costs by suppliers. Meanwhile, average prices charged by private sector firms rose at their fastest pace in nine months, led by a strong and accelerating rise in the services economy high prices paid for fuel and raw materials.

Finally, the outlook for business activity for next year slowed for the fifth consecutive month in December. The latest survey indicated the lowest degree of business optimism since December 2022, largely due to the continued decline in service sector confidence.

Market Reaction to US Spot Services PMI

Market reactions to PMI data have been largely positive. Following the announcement, US stock indices saw gains, reflecting investors’ confidence in the economic outlook. The Dow Jones Industrial Average, S&P 500 and Nasdaq recorded significant increases, driven by gains in sectors closely linked to consumer spending, such as retail, technology and financial services.

In addition, a strong PMI reading has implications for the Fed’s monetary policy decisions. As concerns about inflation persisted, the Fed was closely watching economic indicators to gauge the need for interest rate adjustments. A stronger-than-expected PMI could push the Fed to adopt a more hawkish stance, as strong economic activity generally supports the case for tightening monetary policy to prevent the economy from warming up.

In terms of currency markets, the US dollar strengthened against a basket of major currencies in response to positive PMI data. The appreciation of the dollar can be attributed to increased demand for US assets, as investors seek to benefit from expected economic growth. A stronger dollar also has implications for international trade, as it could make U.S. exports more expensive for foreign buyers. However, the impact on imports could be beneficial, as a stronger dollar allows foreign commodity prices to fall. This dynamic could help ease some of the inflationary pressures in the domestic economy, although it could also pose challenges for U.S. exporters.

Market participants will closely watch the dollar’s performance in the coming weeks as more economic data comes out. This positive momentum should boost the broader economy, potentially driving sustained growth in employment and investment.

Expectations for the current months on the US Spot Services PMI

Looking ahead, analysts are cautiously optimistic about the outlook for the current month. While the previous month’s strong performance provides a solid foundation, several factors may influence upcoming PMI results.

First, ongoing labor market dynamics will play a crucial role. The U.S. labor market has shown signs of stabilization, but challenges remain, especially in sectors that have been most affected by pandemic-related disruptions.

If companies continue to struggle to recruit and retain talent, it could hinder growth in the services sector. In addition, increased costs associated with labor and materials may affect companies’ profitability and willingness to invest in expansion.

Consumer sentiment will also be a crucial factor to watch. Recent surveys have indicated a mixed outlook among consumers, with concerns about inflation and rising interest rates weighing on their willingness to spend.

If consumer spending slows, it could have a cascading effect on the services sector, especially in industries that rely on discretionary spending, such as travel and hospitality. However, if consumers maintain their spending levels, especially as the holiday season approaches, it could provide a significant boost to service sector activity.

Moreover, the geopolitical landscape remains an area of concern. Developments such as trade negotiations, international conflicts and global supply chain disruptions can affect market sentiment and economic performance. Recent tensions in different regions may lead to increased volatility in financial markets, which may affect investor confidence and spending behavior.

Therefore, while the current PMI results are encouraging, it is essential to consider these external factors when assessing the outlook for the services sector. The next PMI release will be closely examined for insights into the health of the economy and potential outcomes.

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