December data highlighted a renewed slowdown in output growth across the U.S. service economy. The seasonally adjusted Markit Flash U.S. Services PMI™ Business Activity Index – which is based on approximately 85% of usual monthly replies – registered 53.7 in December, down from 56.1 and the lowest reading for 12 months. Although comfortably above the 50.0 threshold that separates expansion from contraction, the headline index signalled a softer rate of growth than seen on average since the survey began in late-2009 (55.8).
Reports from survey respondents suggested that improving domestic economic conditions remained a tailwind to growth in December. However, some service providers noted a more subdued willingness to spend among clients. Reflecting this, latest data indicated that incoming new work expanded at the slowest pace since January. Weaker growth of new business contributed to a decrease in backlogs of work across the service sector for the fifth month running in December.
As with last December, some companies again reported adverse weather conditions to have affected business. However, weather appears to have played less of a role in the slowdown this year, with businesses such as transport, accounting, financial services and consulting citing reduced demand for many services from the goods-producing sector, as well as signs of some increased reluctance to spend among consumers.
Activity growth weakened in response to a downturn in order book growth. Inflows of new orders to the two sectors showed one of the smallest increases seen this side of the global financial crisis, slowing sharply in services and almost stalling in manufacturing.
Despite a moderation in new business growth and a corresponding fall in capacity pressures, the latest survey pointed to resilient job creation among U.S. service sector companies. Increased payroll numbers have been recorded in each month since March 2010, and the latest upturn was broadly in line with the average over this period. Anecdotal evidence pointed to job hiring in response to new product launches and long-term expansion plans.
Service providers were optimistic overall about their prospects for growth over the course of 2016, with just over one-third (34%) expecting a rise in business activity while only 5% forecast a reduction. However, the degree of positive sentiment dipped to its lowest recorded for just over five years. The subdued global economic outlook, election uncertainty and softer demand from the oil and gas sector were among the factors cited as weighing on business prospects.
On the prices front, latest data pointed to another slowdown in cost inflation across the service economy. Average input prices increased at the weakest pace since February, helped by falling transportation costs and commodity prices. At the same time, service providers noted that their output charges were little-changed in December.
Markit Flash U.S. Composite PMI™
At 53.5 in December, down from 55.9 in November, the seasonally adjusted Markit Flash U.S. Composite PMI Output Index pointed to a solid expansion of private sector output at the end of 2015. However, the latest rise was the weakest for 12 months, reflecting softer contributions to growth from both services and manufacturing (‘flash’ manufacturing output index at 52.7, down from 54.8 in November).
Commenting on the flash PMI data, Chris Williamson, chief economist at Markit said:
The survey data are consistent with gross domestic product rising at an annualised rate of 1.8% in the fourth quarter. That’s down only slightly from the 2.1% pace observed in the third quarter, but the survey shows a more severe slowing towards the end of the fourth quarter, with an annualised GDP growth rate of just 1.4% indicated for December alone.
Hiring remained encouragingly resilient in the face of the weaker growth trend, pointing to a non-farm payroll increase of 170,000. That’s below the average of 201,000 signalled in the preceding 11 months of the year (and below the official year-to-date average of 210,000), but still strong.
“However, with business expectations about the year ahead dropping in the service sector to the lowest since August 2010, the sustained growth of hiring may soon peter out unless demand revives.”