U.S. ISM Services Index (December 2020)

Johary Razafindratsita, Economist | 416-430-7126

Date Published: January 7, 2021

Share this:

Services sector expansion picks up pace to close the year

  • The Institute for Supply Management's (ISM) Services Index rose by 1.3 points in December to 57.2. The headline print was considerably better than market expectations, which called for a 54.5 print. 
  • Beneath the headline, the picture was mixed. Two of the four main subcomponents improved on the month, while the other two worsened. On the positive side, business activity improved by 1.4 points to 59.4, boosted by seasonal sales and "end-of-year" spending. These factors also lifted new orders, which rose by 1.3 points to 58.5. 
  • By contrast, the employment subcomponent declined by 3.3 points to 48.2 – the only subcomponent to fall into contractionary territory – as businesses continued to grapple with difficult economic conditions. Likewise, the supplier deliveries sub-index increased by 5.8 to 62.8, indicating a slower pace of deliveries as companies faced supply chain disruptions and general freight delays. 
  • Among the remaining indicators, imports continued to grow, though at a slower pace (-3.2 to 51.8), while new export orders accelerated on the month (+6.9 to 57.3). Meanwhile, most service industries reported an increase in prices paid for materials and services in December, though at a slower rate than in the previous month. The prices sub-index fell by 1.3 points to 64.8. 
  • The number of industries reporting growth on the month was unchanged at 14 out of a total of 18 industries counted in the report. The four industries reporting a decrease in December were: Arts, Entertainment & Recreation; Accommodation & Food Services; Other Services; and Real Estate, Rental & Leasing.     

Key Implications

  • The ISM Services Index joined its manufacturing counterpart in closing the year on a good note. The surprise improvement in December came in contrast to the consensus forecast, which expected a rapid surge in new COVID-19 cases and the reintroduction of restrictions across the country to weigh on the services sector. A boost from holiday spending appears to have played a role in lifting the index, though respondents generally remained cautious of current economic and business conditions in their comments. Of particular note, the report pointed to growing constraints in applicable human resources, production capacity and logistics compared to previous months. 
  • The near-term outlook is not particularly encouraging either. The coronavirus continues to spread at an alarming rate, straining the nation's healthcare system, while new variants of the virus – which have already prompted more restrictions in Europe – have emerged as an additional downside risk. At the same time, vaccine rollouts have been slowed by logistical challenges. On the bright side, the latest coronavirus relief package passed by Congress over the holidays should provide a boost to the recovery, while the Democrats' win of the Senate helps clear out the fiscal outlook. Nonetheless, as strong headwinds continue to blow, the path ahead will likely remain bumpy.