The U.S. services industry witnessed a surge in activity in December, driven by a rise in expectations for price increases amidst concerns about tariffs impacting inflation. The Institute for Supply Management’s services index for December reached 54.1%, indicating a growing number of businesses anticipating growth, up 2 percentage points from November. This figure also exceeded the consensus forecast of 53.4% by economists surveyed by Dow Jones.
Price Index Surges
In addition to the uptick in overall activity, the prices index soared to 64.4%, marking a significant increase of 6.2 points, or over 10%. This jump represented the first time since January 2024 that the index had surpassed 60%, with its highest level recorded since February 2023. Steve Miller, Chair of ISM’s Business Survey Committee, highlighted that while there was an air of optimism across various industries, concerns regarding tariffs garnered the most attention from panelists.
Tariff Concerns
The looming threat of tariffs has been a focal point, with President-elect Donald Trump pledging to implement broad tariffs upon assuming office. Despite dismissing reports of a more targeted approach, the ISM manufacturing survey for the month also reflected an increase in prices, with the index rising to 52.5%, up 2.2 points from the previous month.
Impact on Financial Markets
Following the release of these reports, Treasury yields, particularly at the longer-dated end of the curve, saw an upsurge. The benchmark 10-year note recently yielded 4.68%, marking a 0.065 percentage point increase. Respondents in the services survey expressed concerns over tariffs impacting purchasing decisions, amidst an overall positive outlook as 2024 drew to a close.
As the Federal Reserve contemplates its future monetary policy decisions, readings on inflation and employment remain crucial. The central bank, having lowered its benchmark borrowing rate significantly in the latter part of 2024, is anticipated to proceed cautiously as it evaluates incoming economic data.
Overall, the December services index paints a picture of a dynamic and evolving economic landscape, influenced by both domestic and international factors. The interplay between business sentiments, policy decisions, and market reactions underscores the complexity of the modern global economy, where uncertainty and optimism coexist in equal measure.
