Chart of the day: Service sector grew at slower pace in December

The purchasing managers’ index for the service sector grew at a much slower rate in December as supply chain delays continued to put a drag on service activities, according to a report Thursday from the Institute for Supply Management. The slower rate of growth will most likely persist given that the impact of the highly contagious omicron variant did not appear in the data, as comments from survey respondents showed. We expect the new variant to put more pressure on the service sector in the coming months. That means more downside risk to economic activities just as consumption has been shifting from goods toward services in recent months. The headline figure dropped to 62% on the month from 69.1%, marking the 10th month in a row that the index exceeded 60%. Over time, a reading above 49.2% generally indicates overall expansion. But even with all of those risks, a 62% service PMI level was still higher than in the previous two decades. In fact, one has to go back to 1997 to find a higher service PMI, which was at 62.03%. The decrease in overall service activities was driven by softer demand in December as the subindices for business activities and new orders both fell to 67.4% from 74.6%, and to 61.5% from 69.7%, respectively. Snarled supply chains remained the top issue for service providers as shortages of input materials and labor made it harder for businesses to satisfy expanding demand. Both subindices for inventory change and inventory sentiment were under 50, indicating a contracting rate of inventories. Survey respondents expressed these concerns in their comments. Most respondents mentioned problems with inventories and supply of materials. “Long lead times, transportation bottlenecks, delivery inconsistency and price increases continue to affect a range of products,” said a survey respondent working in the retail trade industry. Prices paid for services remained elevated as the subindex for price level registered at 82.5%, slightly higher than in the prior month, which was at 82.3%.

The takeaway

We expect the service sector to grow at an even slower rate in the coming months as the omicron variant starts to show an effect. The impact of the variant on airlines during the holidays, with thousands of flight cancellations, was an early sign of potential trouble. But even during the surge of the delta variant last year, the sector managed to grow in the July to September period. We should expect the expansion of the service sector to continue in the first half of this year.