US Services Data: Will It Delay Fed Rate Cuts?

US Services Sector Surges, Jobs Market Cools: A Contradictory Economic Picture

Teh US services sector unexpectedly rebounded in December, hitting a 14-month high, while simultaneously, indicators suggest a cooling labor market. This divergence presents a complex economic landscape as investors await further data, particularly Friday’s non-farm payrolls report.

Services ISM Defies Expectations

December’s US service sector ISM index climbed too 54.4, a important jump from 52.6 in November and exceeding the market consensus of 52.2. In fact, the reading surpassed all predictions and represents the strongest performance since October 2024. The ISM index, a purchasing managers’ index, gauges business activity across key metrics like output and orders, with any reading above 50 indicating expansion.

Business activity itself rose to 56.0 from 54.5, and crucially, the employment component increased to 52.0 from 48.8 – marking the first expansion in employment within the services sector since May. New orders experienced a ample increase, jumping to 57.9 from 52.9. The only area of relative weakness was the backlog of orders, which decreased to 42.6 from 49.1. With the prices paid component remaining high at 64.3, ongoing inflation pressures within the sector are evident.

“All in all, this is a very strong report,” one analyst noted, suggesting the Federal Reserve may be able to maintain its current monetary policy for the time being. However, the strength of this report sharply contrasts with recent, weaker regional Fed surveys of the service sector. Yesterday’s data also indicated a cooling trend. [Chart showing the relationship between output ISM measures for services and manufacturing versus economic growth would be beneficial here.]

Did you know? – The ISM Services PMI is a widely-watched indicator of economic health. A reading above 50 generally signals expansion in the services sector, which comprises a large portion of the US economy.

Jobs Market Signals a ‘Low Hire, Low Fire’ Environment

Separately, the Job Openings and Labor Turnover statistics (JOLTS) report revealed a surprising decline in job vacancies to 7.15 million in November, down from a revised 7.45 million. Despite this decrease, the layoff rate edged down to 1.1% from 1.2%, while the quit rate saw a slight increase to 2% from 1.9%. This data reinforces the narrative of a “low hire, low fire” economy, a trend also illustrated by the recent private payrolls report, which showed a 41,000 increase in employment in December.

The consensus forecast for Friday’s non-farm payrolls report has been revised slightly upward to 70,000. This would result in payrolls growth averaging around 40,000 per month over the past six months, consi

Pro tip – the JOLTS report provides insight into labor market dynamics beyond just the headline unemployment rate. Monitoring job openings, layoffs, and quit rates can reveal underlying trends in worker confidence and employer demand.

increase following the release of these reports, but the overall market sentiment remains slightly risk-off. Markets continue to anticipate approximately 60 basis points of Federal Reserve rate cuts throughout the year.

Reader question – How do you think the Federal Reserve will balance the strong services sector data with the cooling labor market indicators when making future interest rate decisions? Share your thoughts!

Here’s a breakdown answering the “Why, Who, What, and How” questions, based on the provided text:

* Why: