The US service sector experienced its most rapid expansion since October 2021, according to the latest S&P Global flash data for December. This surge in service activity provides a significant boost to the overall economy, even as the manufacturing sector continues to weaken. The service provider index jumped to 58.5 from 56.1 in November, exceeding the 50-point threshold that signifies growth. Furthermore, the composite index for future output soared to 71.1, its highest point since May 2022, indicating strong optimism for continued economic expansion.
Table Content:
- Diverging Economic Landscape: Services Thrive While Manufacturing Falters
- Service Sector Optimism Drives Economic Outlook
- Empire State Manufacturing Index Plunges
- Input Costs Diverge: Manufacturing Faces Inflationary Pressures
- Service Sector Momentum Fueled by New Business Growth
- Conclusion: Service Sector Strength Supports Economic Growth Amidst Manufacturing Challenges
Diverging Economic Landscape: Services Thrive While Manufacturing Falters
This recent data highlights a growing divergence within the US economy. While the service sector flourishes, manufacturing activity is experiencing a noticeable downturn. Factory output and orders contracted at an accelerated pace in December, primarily driven by a sharp rise in input prices. Concerns about potential tariffs imposed by the Trump administration are contributing to these inflationary pressures on manufacturers.
Service Sector Optimism Drives Economic Outlook
Despite the challenges facing the manufacturing sector, overall economic confidence remains high. The 12-month outlook has reached a 2 1/2-year high, suggesting that the current economic upswing will not only persist into the new year but could also broaden to encompass more sectors. Chris Williamson, chief business economist at S&P Global Market Intelligence, attributed this optimism to the robust performance of the service sector. He noted, however, that the initial post-election enthusiasm within the manufacturing sector has been tempered by concerns surrounding tariffs and their potential impact on inflation through increased import costs.
Empire State Manufacturing Index Plunges
Reinforcing the struggles faced by manufacturers, a separate report from the Federal Reserve Bank of New York revealed a significant decline in its Empire State manufacturing activity index. This drop, the largest since May 2023, follows a surge in November that pushed the index to a near three-year high.
Input Costs Diverge: Manufacturing Faces Inflationary Pressures
The divergence between the service and manufacturing sectors is further evident in their input costs. While manufacturers experienced a sharp jump in prices paid for materials, reaching a high not seen since late 2022, service providers saw input costs grow at their slowest pace in over four years. This difference is largely attributed to weaker wage growth in the service sector.
Service Sector Momentum Fueled by New Business Growth
The surge in service sector activity is underpinned by the strongest growth in new business since March 2022. This positive momentum is reflected in the outlook for services activity, which has improved to a more than two-year high. Manufacturers, while facing challenges, also maintain an elevated outlook, anticipating benefits from business-friendly policies under the Trump administration. However, a key indicator of factory order backlogs contracted at its fastest rate since the onset of the pandemic, raising concerns about future manufacturing activity.
Conclusion: Service Sector Strength Supports Economic Growth Amidst Manufacturing Challenges
The December data paints a picture of a two-sided US economy. The robust expansion of the service sector provides crucial support for overall economic growth, counterbalancing the continued downturn in manufacturing. While optimism remains high for continued economic expansion into the new year, the manufacturing sector faces significant headwinds from rising input costs and potential trade tensions. The future trajectory of the US economy will likely depend on the interplay between these two sectors and the effectiveness of policy responses to address the challenges facing manufacturers. The data for this survey was collected between December 5th and 13th.
