Service Sector Improves, But Not Without Problems

Tuesday, January 5’s release of the ISM’s reading on the manufacturing sector showed a significant acceleration in activity for the month of December. The service sector counterpart released today similarly showed that activity grew at a more rapid pace in December, though the improvement was not as dramatic as seen in the manufacturing sector.

The headline index rose to a three-month high of 57.2, from 55.9 in November. On a combined basis and accounting for each sector’s share in the overall economy, the composite ISM for December rose 1.5 points to 57.6 -- the highest reading since July.

Although the headline index was higher, breadth in the Non-Manufacturing report was mixed. Half of the indices for the various categories were lower month-over-month, with two of them, Backlog Orders and Employment, falling into contraction.

Overall, the report showed that service sector demand continued to grow in December, but lead times were longer and employment was cut back for the first time since August.

The commentary section also painted a more mixed picture than the uptick in the headline number. A number of comments noted that recently implemented shutdowns and surges in COVID-19 cases have had negative impacts on businesses, ranging from weaker demand to labor shortages to supply and logistics issues.

Although many comments noted how COVID-19 has recently impacted demand, December was all around a pretty good month. New Orders remain well off the highs from the late spring through the fall, and are also below levels from prior to COVID-19. Yet December’s reading of 58.5 was nonetheless consistent with growth in order volumes.

That marked a seventh consecutive month of growth (above 50) in New Orders and an acceleration versus November. Meanwhile, businesses have made progress in working off their backlog of orders. That index fell into contraction for the first time in six months, falling two points to 48.7. That is the lowest level in the Backlog Orders index since May

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