The Fed will not like these reports showing that the important U.S. services sector is slowing and showing little momentum in new orders. Services employment is about to slow down, perhaps significantly.
January data highlighted that U.S. service providers started the year with a further slowdown in output and new business growth. At the same time, survey respondents indicated a relatively subdued degree of confidence about their prospects for growth over the next 12 months, with firms linking this to heightened uncertainty about the wider economic outlook.
Employment growth was nonetheless sustained in January and the latest rise in payroll numbers was the fastest since September 2015. Input cost inflation remained marginal, helped by falling fuel prices, which in turn led to only a slight increase in service sector output charges during the latest survey period.
Adjusted for seasonal influences, the final Markit U.S. Services Business Activity Index registered 53.2 in January, down from 54.3 in December, to indicate the weakest pace of activity growth since the current period of expansion began in late-2013. Although still above the crucial 50.0 no-change value, the latest index reading was also below the average recorded since the survey began in October 2009 (55.8).
The seasonally adjusted final Markit U.S. Composite PMI™ Output Index registered 53.2 in January, down from 54.0 in December, to signal the weakest rise in private sector business activity since October 2013. The overall slowdown in January largely reflected a more subdued expansion of service sector activity, as manufacturing output rose at a slightly faster pace than December’s 26-month low.
Reports from survey respondents suggested that softer new business growth was the main factor weighing on service sector output in January. Moreover, a number of firms noted signs of a cyclical slowdown in client demand, driven in part by greater caution about the economic outlook. Reflecting this, January data pointed to a moderate increase in new work across the service economy, with the rate of expansion easing to a 12-month low.
Slower growth of incoming new business contributed to a drop in backlogs of work for the sixth consecutive month in January. A further solid expansion of staff hiring helped to reduce capacity pressures at the start of 2016. Rising payroll numbers were linked to new product launches and ongoing business expansion plans. That said, the latest survey indicated that service providers’ overall degree of business confidence was up only slightly since December and still close to its lowest recorded for three-and-a-half years.
Meanwhile, service sector firms continued to experience subdued cost inflation in January, despite reports of rising salary pressures. Prices charged by service providers increased for the fourth month running, but the rate of inflation remained marginal.
The NMI® registered 53.5 percent in January, 2.3 percentage points lower than the seasonally adjusted December reading of 55.8 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 53.9 percent, which is 5.6 percentage points lower than the seasonally adjusted December reading of 59.5 percent, reflecting growth for the 78th consecutive month at a slower rate.
The New Orders Index registered 56.5 percent, 2.4 percentage points lower than the seasonally adjusted reading of 58.9 percent in December. The Employment Index decreased 4.2 percentage points to 52.1 percent from the seasonally adjusted December reading of 56.3 percent and indicates growth for the 23rd consecutive month.
The Prices Index decreased 4.6 percentage points from the seasonally adjusted December reading of 51 percent to 46.4 percent, indicating prices decreased in January for the third time in the last five months.
According to the NMI®, 10 non-manufacturing industries reported growth in January. The majority of the respondents’ comments are positive about business conditions; however, there is a concern that exists relative to global conditions, stock market volatility, and the effect on commercial and consumer confidence.