Economic activity in the services sector contracted in December after 30 consecutive months of growth — with the Services PMI® registering 49.6 percent — say the nation's purchasing and supply executives in the latest Services ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee: “In December, the Services PMI® registered 49.6 percent, 6.9 percentage points lower than November’s reading of 56.5 percent. The composite index contracted for the first time since May 2020, when it registered 45.2 percent. The Business Activity Index registered 54.7 percent, a substantial — 10 percentage point — decrease compared to the reading of 64.7 percent in November. The New Orders Index contracted in December for the first time since May 2020; the figure of 45.2 percent is 10.8 percentage points lower than the November reading of 56 percent.

“The Supplier Deliveries contracted in December, indicating faster performance. The index registered 48.5 percent, 5.3 percentage points lower than the 53.8 percent reported in November. (Supplier Deliveries is the only ISM® Report On Business® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.)

“The Prices Index was down 2.4 percentage points in December, to 67.6 percent. The Inventories Index contracted for the seventh consecutive month; the reading of 45.1 percent is down 2.8 percentage points from November’s figure of 47.9 percent. The Inventory Sentiment Index (55.9 percent, up 11.7 percentage points from November’s reading of 44.2 percent) returned to expansion after four straight months in contraction.

“According to the Services PMI®, 11 industries reported growth. The composite index ended a 30-month period of growth, contracting for the first time since two straight months of sub-50 percent readings in April and May 2020. Of the four subindexes that directly factor into the Services PMI®, three — New Orders, Employment and Supplier Deliveries — contracted in December. Prior to the current contraction in the services sector, the PMI® indicated growth for all but two of the previous 154 months, including a faster rate of expansion in November.”

Nieves continues, “Business Survey Committee respondents indicated that supplier deliveries were faster in December, based on increased capacity and improved logistics. Employment contracted due to a combination of decreased hiring due to economic uncertainty and an inability to backfill open positions. The holiday season contributed to the continued growth in business activity, albeit at a slower rate.”

INDUSTRY PERFORMANCE

The 11 services industries reporting growth in December — listed in order — are: Retail Trade; Health Care & Social Assistance; Utilities; Public Administration; Arts, Entertainment & Recreation; Mining; Accommodation & Food Services; Transportation & Warehousing; Management of Companies & Support Services; Professional, Scientific & Technical Services; and Finance & Insurance. The six industries reporting a decrease in the month of December — listed in order — are: Real Estate, Rental & Leasing; Wholesale Trade; Other Services; Information; Construction; and Educational Services.

WHAT RESPONDENTS ARE SAYING

- “Business is slower than usual. Seems to be a three- or four-month trend. We expect it to pick up after the first of the year.” [Agriculture, Forestry, Fishing & Hunting]
- “Residential new construction continues to be hindered by higher interest rates, slowing sales dramatically. A shift to rental projects seems to be a trend for all builders.” [Construction]
- “We’re dealing with inflation, increasing labor costs, longer lead times and the higher education sector struggling to retain employees.” [Educational Services]
- “Business conditions for year-end 2022 are good, but not great. Preparing for a possible recession in 2023, but with some optimism in the overall economy.” [Finance & Insurance]
- “Continue to see product pricing, staffing and labor cost increases across the board, with almost no easy savings opportunities in our supply chain operation. Feel that this will be the standard in 2023.” [Health Care & Social Assistance]
- “Electronic component supply is becoming much better week by week.” [Information]
- “Activity level remained flat as we began to round out the year.” [Mining]
- “Seeing continual slowing of orders, along with a more receptive supply base.” [Professional, Scientific & Technical Services]
- “We are optimistic, although concerned, about continued inflation pressures, lead times that remain well above typical and supply chain issues that just won’t go away. Increasing interest rates are dampening the residential housing construction market, which only adds to the concerns.” [Real Estate, Rental & Leasing]
- “Higher-than-average increases in end-of-year software and support renewals due to increased labor and economy costs.” [Retail Trade]
- “We are in the busiest season of the year in our business, and inflation is definitely putting the squeeze on our margins.” [Wholesale Trade]