Implications:  After a shaky first half the ISM Services Index closed the year on a solid note by beating consensus expectations and rising to 54.1 in December.  The continued resilience in the service sector represents a stark contrast to the manufacturing sector which has been limping along the last two years.  Looking at the details of the report, fourteen out of eighteen major service industries reported growth in the month while three reported contraction (Mining, Real Estate, and Educational Services).   The rise in the overall index was driven by higher business activity and new orders, as both of these categories rose in December and sit firmly in expansion territory, at 58.2 and 54.2, respectively.  The majority of survey comments impart a positive outlook for the year ahead, while some report they are holding off on capital projects until they have a better idea of future policy from the incoming Trump administration.  Meanwhile, hiring in the service sector appears balanced, with the employment index little changed at 51.4, and an equal number of industries (five) reporting an increase versus a decrease in employment for the month.  Finally, and perhaps most important, inflation remains a major problem.  The highest reading for any major category was once again the prices index, which rose to 64.4 – the highest level since early 2023. Survey comments continue to voice concern over potential tariffs and uncertainty with how that will impact future pricing.  But it’s important to remember inflation was already a problem before any new tariffs; case in point, fourteen major industries reported paying higher prices in December while just one reported paying lower (Agriculture, Forestry, Fishing & Hunting). And while monetary policy is tight (the M2 measure of the money supply is down 1.3% from its peak in early 2022), it is less tight than it was before the Federal Reserve began cutting rates in September.  We believe there are serious risks that an overly aggressive path of cuts and/or the Treasury dipping into the Treasury General Account in response to the debt ceiling (more here) could bring with them a pickup in the M2 measure of money, and with it a return of higher inflation. As for the economy, the service sector continues to be a lifeline for growth.

Click here for a PDF version