US Services Sector Growth Accelerates to a Yearly High
The ISM Services PMI unexpectedly climbed to 54.4 in December, signaling robust economic activity and easing concerns over a potential slowdown.
The U.S. services sector, a crucial engine for the nation's economy, expanded at its fastest pace in a year this past December, providing a strong signal of economic resilience heading into the new year. The Institute for Supply Management (ISM) reported Wednesday that its services Purchasing Managers' Index (PMI) rose to 54.4, a significant jump from November's 52.6 reading and well ahead of economists' consensus forecast of 52.3.
This marks the 10th consecutive month of growth for the services sector, which encompasses a wide range of industries from finance and retail to healthcare. A reading above 50 indicates expansion. The robust report sent a wave of optimism through financial markets, with the S&P 500 advancing 0.6% to close at a new record high of 6,944.82.
The strength in the headline number was supported by broad-based gains across key sub-indexes. The New Orders Index, a forward-looking indicator of business demand, climbed to 57.9, while the Business Activity Index registered a strong 56.0. Perhaps most notably, the Employment Index moved back into expansion territory at 52.0, its first positive reading in seven months, easing concerns about a cooling labor market within the service industry.
"This was an unexpectedly strong report that paints a picture of a healthy and expanding services economy," said one market analyst. The data suggests that consumer and business spending remained solid through the holiday season and end-of-year activities. According to the official ISM release, eleven different services industries reported growth in December, led by Retail Trade and Accommodation & Food Services.
While the activity metrics were strong, the report also contained welcome news on the inflation front. The Prices Index, which tracks the cost of inputs for services businesses, decreased slightly to 64.3. Although this still indicates rising prices, it represents a moderation in inflationary pressure, a trend closely watched by the Federal Reserve.
The data complicates the immediate outlook for Federal Reserve policy. While the central bank is widely expected to begin cutting interest rates in 2026, the resilience shown in the services sector may argue against any rush to ease monetary policy. The strong employment reading, in particular, suggests the labor market remains tight enough to support wage growth and, by extension, consumer spending.
Still, the market's positive reaction indicates that investors are viewing the data through a "soft landing" lens—a scenario where economic growth continues at a healthy pace without triggering a new surge in inflation. For now, the strong end to 2025 for the services sector provides a firm foundation for the U.S. economy, suggesting that momentum, as reported by Morningstar, has carried over into the new year.