In December 2020, the service sector, which contributes about 90% of the U.S. economy, was in expansionary territory for the seventh consecutive month and rebounded unexpectedly from a new six-month low. Despite strong new orders and business activity indices, employment indicators returned to contraction, overshadowing Friday’s nonfarm payroll release.
The U.S. Institute for Supply Management (ISM) announced on Thursday, Jan. 7, that the U.S. ISM Services Index (previously known as the non-manufacturing index) unexpectedly rose to 57.2 in December 2020, after a six-month low of 55.9 in November, and the market had expected a decline to 54.5 on a year-over-year basis.
The index, which has averaged 54.3 over the past 12 months, had fallen into contraction territory in April and May 2020 due to the impact of the new crown epidemic, breaking a 122-month cycle of consecutive expansion. Prior to December, the data from August to November, despite being above the 50 Rongguan line, fell back each month from the previous year, indicating that the U.S. service sector continued to expand but at a slower pace.
Of the core sub-indices.
The New Orders Index rose to 58.5 in December from a previous value of 57.2, the seventh consecutive month in expansionary territory, and also broke the trend of four consecutive months of year-over-year cooling, which had been 67.7 in July 2020, the highest since data records began in 1997.
The business activity index (similar to the ISM manufacturing industrial output index) rose to 59.4 from 58, expanding for the seventh consecutive month and breaking a four-month trend of year-over-year cooling that had been highest since 2004 with 67.2 in July 2020. Feedback from industry representatives interviewed said the indicator showed potential improvement, but limited demand as many people work from home.
Notably, the employment index fell to 48.2 from a previous value of 51.5, returning to shrinking territory for the first time in four months. This indicator expanded for 72 consecutive months before the epidemic, then fell into contraction from March to August 2020 before expanding once from September to November and touching its highest since February.
The Supplier Delivery Index rose sharply from 57 to 62.8, a 5.8-point increase from a year earlier. A reading above 50 represents a slower pace of delivery and is generally viewed as a positive sign of an improving economy and increased demand on the consumer side. Industry representatives provided feedback that suppliers were impacted by supply chain disruptions in core components and increased ordering of certain tools and equipment, increased holiday demand and volume restrictions on package deliveries resulting in freight delays.
In addition, the inventory index rose to 58.2 from 49.3, returning to expansionary territory to the highest since June, as suppliers were busy replenishing inventories to mitigate supply chain risks. The price paid index fell to 64.8 from 66.1; the backlog of orders index fell to 48.7 from 50.7, returning to contraction after six consecutive months of expansion. New export orders expanded for the fifth consecutive month, rising from 50.4 to 57.3, a six-month high. Import orders cooled.
In a public statement, Anthony Nieves, chairman of the ISM Services Business Survey Committee, said industry representatives surveyed had mixed views on business and economic conditions.
Various local and state government anti-vaccine restrictions continue to negatively impact businesses and industries, with greater restrictions on human resources, capacity and logistics than in November.
However, with the distribution of vaccines, most respondents are “cautiously optimistic” about business conditions. A total of 14 industries reported growth and four contracted: arts, entertainment and recreation; accommodation and food services; other services; and real estate and rental.
Representatives interviewed in the construction industry said labor shortages continue to be a significant drag on growth, and declining capacity has led to consideration of rejecting certain orders. Educational services, as well as vocational, scientific and technical services, cited a “significant slowdown in overall delivery” and “transportation delays beginning to affect operations.
The latest ISM data diverged from Wednesday’s release of the Markit U.S. Services PMI for December, which fell to a final reading of 54.8, the lowest since September 2020, and still expanded for five consecutive months. Among them, the employment sub-index fell to 53.4, the sixth consecutive month of expansion.
Combined with Wednesday’s release of the “small non-farm” private sector ADP employment not up but down, are overshadowed by Friday’s non-farm employment data. The mainstream market currently expects non-farm payrolls to increase by 50,000, the lowest value since employment began to rebound in May 2020.
Another notable phenomenon is that three of the four released December ISM and Markit manufacturing and non-manufacturing indices (in addition to the Markit services PMI) were boosted by a rise in the supplier delivery index. The latter is a reverse indicator, that is, the higher the data represents longer delivery times, although it can be interpreted as a result of strong demand, but also can not exclude supply chain disruptions continue to become a risk.
Zerohedge, a financial blog known for its “venomous” voice, has argued that the December data is an anomaly, as the statistics agency interpreted the delay in supplier deliveries as a positive signal. Another analysis pointed out that it was “surprising” that the services index rose rather than fell during the resurgence of the epidemic at the end of the year, and that tighter business and travel restrictions were supposed to have hit demand and the job market hard.
However, the overall positive data release, the Dow expanded to 350 points, the Nasdaq rose more than 2%, and for the first time in history exceeded the 13,000-point mark, the S&P 500 index rose 1.6%, and for the first time in history exceeded the 3,800-point mark. All three major U.S. stock indexes hit new intraday highs.
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