U.S. service sector contracts in December, price increases slow, ISM survey says

A barista makes coffee for a customer in Houston
A barista makes coffee for a customer in Houston, Texas, U.S., March 10, 2021. REUTERS/Callaghan O'Hare/File Photo

WASHINGTON, Jan 6 (Reuters) - U.S. services industry activity contracted for the first time in more than 2-1/2 years in December amid weakening demand, while the pace of increase in prices paid by businesses slowed considerably, offering more evidence that inflation was abating.

The Institute for Supply Management (ISM) said on Friday its non-manufacturing PMI dropped to 49.6 last month from 56.5 in November. It was the first time since May 2020 that the services PMI fell below the 50 threshold, which indicates contraction in the sector that accounts for more than two-thirds of U.S. economic activity.

Outside the COVID-19 pandemic slump, this was the weakest services PMI reading since late 2009. The index is also now below the 50.1 level, which the ISM says over time is consistent with a recession in the broader economy.

Economists polled by Reuters had forecast the non-manufacturing PMI slipping to 55.0.

The weakness in the services sector came in the wake of another ISM survey this week showing manufacturing slumping for a second straight month in December.

The Federal Reserve's fastest interest rate-hiking cycle since the 1980s as it battles inflation is dampening demand across the economy, though the labor market remains resilient.

The ISM survey's gauge of new orders received by services businesses fell to 45.2 from 56.0 in November. That was the lowest level since May 2020 and weakest reading since 2009, excluding the collapse during the pandemic.

A measure of prices paid by services industries for inputs dropped to 67.6, the lowest since January 2021, from 70.0 in November as supply bottlenecks continued to ease.

The survey's measure of services industry supplier deliveries fell to 48.5 from 53.8 in November. A reading above 50 indicates slower deliveries.

With a measure of prices paid by manufacturers contracting for a third straight month in December, inflation pressures are likely to continue subsiding, though the labor market will probably determine the future course of monetary policy.

The ISM's measure of services industry employment fell to 49.8 from 51.5 in November. Labor market conditions, however, remain tight. The Labor Department reported this week that there were 10.458 million job openings at the end of November, which translated to 1.74 jobs for every unemployed person.

First-time applications for unemployment benefits fell to a three-month low in the last week of December.

The Fed last year hiked its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007. Last month, it projected at least an additional 75 basis points of increases in borrowing costs by the end of 2023.

Reporting By Lucia Mutikani; Editing by Chizu Nomiyama

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