U.S. service sector business activity grows in December on strong rise in new orders, PMI index rises to 52.8

U.S. service sector companies pointed towards a moderate growth in business activity in December, with growth driven by a more solid rise in new orders. The seasonally adjusted final IHS Markit US Services Business Activity Index rose to 52.8 in December from November’s 51.6, hinting at a further recovery in output growth after a slump in activity in summer. The moderate upturn accelerated to the most rapid since July and was attributed to more favourable demand conditions. A second straight rise in new business drove the growth in output, with more solid client demand resulting in the most rapid rise in new orders for five months.

Even if growth was comparatively lacklustre overall, it hinted at a turnaround from the slight contraction recorded in October. Foreign client demand also rebounded, with service providers recording the first upturn in new business from abroad since July. The pace of growth was fractional overall but was only slightly slower than the series trend.

Therefore, service providers increased hiring efforts as employment rose for the second consecutive month and at the most rapid pace since July. Although only modest overall, the upturn in workforce figures was commonly attributed to greater business requirements after a rise in new order growth. In the meantime, backlogs of work were widely unchanged at the end of 2019, as companies signalled slight strain on capacity. Although some noted that greater new business inflows had exerted pressure on operations, others stated that orders and projects were completed in a timely manner.

Meanwhile, cost burdens rose for the third straight month and at a more rapid pace. The rise in input prices was linked to higher supplier and wage costs. The rise was the sharpest since July in spite of being only modest. Meanwhile, service sector companies were able to raise their selling prices at a strong rate. The pace of output charge inflation outpaced the rise in input prices and was the most rapid since February. Greater output prices were greatly attributed to attempts to pass higher costs on to clients.

Lastly, business expectations for the coming year rebounded in the month. Where companies expect a rise in activity over the coming 12 months, they linked this to hopes of further boosts to new sales. However, the extent of sentiment was much below the series trend and levels recorded in December 2018, with several companies reporting uncertainty as to the stability of client demand.