U.S. service providers remained in expansion mode at the end of 2014, but rates of output and new business growth moderated further from the post-crisis peaks seen earlier in the year. A slowdown in output growth contributed to the weakest rise in service sector payroll numbers for eight months in December. However, service providers remain upbeat about their prospects for activity growth over the next 12 months, while subdued input cost inflation continued to support operating margins across the sector.
Adjusted for seasonal influences, the final Markit U.S. Services Business Activity Index registered 53.3 in December (earlier ‘flash’ reading: 53.6), down from 56.2 in November and the lowest since February. That said, the index remained comfortably above the 50.0 no-change value and signalled a solid expansion of overall business activity. Anecdotal evidence generally linked sustained output growth to improving domestic economic conditions.
The seasonally adjusted final Markit U.S. Composite PMI™ Output Index (covering manufacturing and services) registered 53.5 in December, down from 56.1 in November and lower than the earlier ‘flash’ reading of 53.8. Moreover, the index pointed to the slowest expansion of U.S. private sector business activity for 14 months. The moderation in output growth reflected weaker contributions from both the manufacturing and service sectors in December.
Weaker overall output growth during December in part reflected a further slowdown in the pace of new business expansion across the service sector. Moreover, latest data indicated that new business growth moderated for the third month running to its least marked since September 2012. Some firms cited more cautious spending patterns among clients and associated delays in the launch of new projects.
However, service providers remain strongly upbeat about the prospects for output growth over the next 12 months, with almost half of the survey panel (48%) forecasting a rise in business activity and less than 5% anticipating a reduction.
Payroll numbers increased again in December, with service providers attributing job creation at their units to rising workloads and positive business sentiment. That said, the rate of employment growth was only marginal in December and the weakest for eight months. Meanwhile, volumes of work-in-hand (but not yet completed) increased for the fifth month running, but the rate of expansion was the slowest seen over this period.
December data indicated that service sector input cost inflation was only fractionally higher than the 19-month low recorded in November. Subdued cost pressures contributed to the slowest rise in service providers’ output charges since July.
Nonmanufacturing activity posted solid performance in 2014, as measured by the Institute for Supply Management’s (ISM) composite nonmanufacturing index. It rose to 56.3 last year from 54.7 in 2013 and was at its highest point since 2005. For December, however, the index backed off to 56.2 from an unrevised 59.3. It was the lowest level in six months.
Performance amongst the components was uniformly negative last month. The business activity series fell to 57.2, the lowest level in nine months. The new orders reading fell hard to 58.9, its lowest level since April. The vendor deliveries index eased to 52.5, indicating the quickest delivery speeds since October. Also to the downside was the employment reading. It fell to 56.0 from 56.7 and remained sharply lower than the record high reached in October. During the last ten years, there has been a 93% correlation between the employment index and the m/m change in service plus construction payrolls.
The prices paid series also fell sharply to 49.5 from 52.4; the first month of declining prices, on balance, since September 2009. The annual reading of 56.9 was slightly better than 2013, but well below the 2008 high of 65.9. Twelve percent of respondents paid higher prices, down from the 2011 high of 57%. Eighteen percent paid lower prices, up from the June low of 3%. (Haver Analytics)