U.S. service providers indicated a solid upturn in business activity at the end of 2016, although the rate of expansion eased further from October’s recent peak amid a slightly softer rise in new work.
The latest survey nonetheless revealed an acceleration in jobs growth for the third month running and a stronger degree of optimism about the year-ahead business outlook. Meanwhile, cost pressures intensified in December, with the latest rise in input prices one of the fastest seen since mid-2015.
Adjusted for seasonal influences, the Markit Flash U.S. Services PMI™ Business Activity Index posted 53.4 in December, down slightly from 54.6 in November but above the 50.0 no-change value for the tenth consecutive month. The average reading for the final quarter of 2016 (54.2) pointed to the steepest upturn in service sector output since Q4 2015.
Higher levels of business activity were linked to a sustained improvement in client demand during December. The rate of new business growth eased from November’s recent peak, but remained one of the fastest seen over the past 12 months. Survey respondents commented on improving domestic economic conditions and a general upturn in willingness to spend among clients.
December data highlighted a renewed rise in backlogs of work across the service economy, largely driven by stronger sales volumes and associated pressures on operating capacity. This encouraged greater staff hiring during the latest survey period, with the rate of job creation the fastest since March.
Service providers reported a strong degree of optimism regarding the year-ahead business outlook in December. The latest reading was well above the survey-record low seen in June, but still slightly weaker than the average recorded since the survey began in late-2009. Anecdotal evidence suggested that stronger pipelines of new work and an expected rebound in U.S. economic conditions had underpinned service sector optimism about the outlook for 2017.
Meanwhile, input cost inflation picked up in December to its second-fastest since July 2015. Survey respondents commented on rising raw material costs, and increased food prices in particular. A robust and accelerated rise in operating costs resulted in higher prices charged by service providers in December. Although only modest, the latest increase in prices charged was one of the largest seen since June 2015.
The seasonally adjusted Markit Flash U.S. Composite PMI Output Index registered 53.7 in December, down from 54.9 in November, to signal the slowest upturn in private sector output for three months.
However, on average in Q4 2016 the index registered 54.5, to signal the steepest quarterly pace of expansion for exactly one year. Manufacturing production increased at a robust pace in December (‘flash’ output index at 55.1), which exceeded the rate of growth seen across the service economy at the end of 2016 (‘flash’ index at 53.4).
Chris Williamson, Chief Business Economist at IHS Markit:
The surveys are consistent with GDP rising at an annualised rate of 2.0% in the fourth quarter, fuelled mainly by improving domestic demand.
The December slowdown looks likely to be a temporary blip, not least because firms took on staff in increasing numbers in the expectation of rising workloads in 2017. The two flash PMI surveys are signalling a respectable 190,000 increase in nonfarm payrolls in December.