U.S. President-elect Donald Trump has yet to take office, but the "Trump effect" is already beginning to manifest in the market. Concerns over potential tariff hikes under his administration have contributed to a slowdown in the latest U.S. services PMI, which registered its slowest expansion in three months. Both the new orders and business activity indices have declined, and corporate commentary, including from the information technology sector, highlights fears that tariffs could impact the prices of electronic products and components in 2025.
Nevertheless, the overall performance of the services sector remains in expansionary territory, indicating that the economic growth trajectory has not been significantly affected. Looking ahead, the market is closely watching tomorrow’s release of employment data. If results align with market expectations (nonfarm payrolls increasing to 202,000 and the unemployment rate holding steady at 4.1%), this would further support the Federal Reserve in adopting a more cautious approach to policy adjustments.
The U.S. services PMI registered at 52.1 (previously 56.0), expanding for the fifth consecutive month, according to data released by the Institute for Supply Management (ISM) on December 4. However, the pace of expansion slowed to a three-month low and significantly missed market expectations of 55.5.
Among the subindices, all four components showed declines. The business activity index dropped to 53.7 (previously 57.2), and the new orders index fell to 53.7 (previously 57.4). While both indices contracted for the second consecutive month, they remained in expansion territory, signaling ongoing growth in U.S. service demand. However, uncertainties surrounding President-elect Trump’s proposed tariff policies and potential cabinet changes have tempered the growth momentum.
Surveyed information sector companies noted that tariff policies are highly likely to affect the prices of electronics and components. Meanwhile, the construction industry indicated that while the uncertainty surrounding election results has dissipated, changes in tariff policies have once again cast a shadow over future prospects.
The employment index declined to 51.3 (previously 53.0), aligning with the same-day report showing November ADP employment growth slowing to 146,000 (down from 184,000). However, improvements in JOLTs data, including hiring, layoffs, and quits, indicate that the labor market remains stable.
Meanwhile, the supplier delivery time index fell into contraction territory at 49.5 (previously 52.1), reflecting the resolution of temporary disruptions from port strikes and slower demand, which contributed to shortened delivery times.
Other indices showed mixed trends. The prices index rose slightly to 58.2 (previously 58.1), marking 90 consecutive months of expansion. The imports index climbed to 53.8 (previously 50.3), reflecting seasonal growth driven by the traditional holiday shopping period.
Steve Miller, Chair of the ISM Services Business Survey Committee, highlighted the positive performance, noting that 14 out of 16 industries reported growth in business activity, while 13 industries saw increases in new orders. These figures surpassed October’s results, with surveyed companies expressing a shift from neutral to positive outlooks, reinforcing the growth trajectory in service sector demand.
In summary, despite uncertainties introduced by Trump’s impending tariff policies, the sustained expansion in business activity, new orders, and employment indices indicates that demand growth remains robust, providing a strong foundation for fourth-quarter economic growth.
The market's attention now turns to the nonfarm payrolls and unemployment rate data scheduled for release on December 6. Current market expectations anticipate a healthy rebound in nonfarm payrolls to approximately 202,000 (up from the previous 12,000), with the unemployment rate remaining steady at 4.1%. If the employment data aligns with these projections, it would likely reinforce the Federal Reserve's inclination, as articulated by Chair Powell yesterday, to proceed with a more cautious approach in light of reduced downside economic risks.
ISM Service Industry Comments
Federal Reserve interest rate cuts have not had the desired effect on mortgage rates yet. With election results mostly determined, expansion of residential construction is anticipated, but the unknown effect of tariffs clouds the future.” -- Construction
“All operations are normal at the moment. Nothing local or national that is having any major effect on our operations.” -- Educational Services
“Higher level of activity is driving the need for additional resources.” -- Finance & Insurance
“We have concern after the presidential election that tariffs will affect prices for electronics and components in 2025.” -- Information
“Domestic lead times still seem very long. We are having to go to China for many electrical equipment requirements. Even after tariffs, the price is half, and so are the lead times.” -- Management of Companies & Support Services
“Election results and the potential tariff changes would impact inventory and lead to higher prices in the hospital supply chain. What we saw during COVID-19 with startup U.S. production is a warning sign again.” -- Professional, Scientific & Technical Services
“Construction materials are shorted or hard to get due to increased construction projects in the area and (in the) U.S. Sometimes projects are delayed due to this.” -- Public Administration
“We finished a solid quarter and are planning on a similar holiday period. Not breaking any records, but positive.” -- Retail Trade
“Still waiting to see how presidential cabinet picks shake out, if they are confirmed and how they will affect our operations going forward. Holding capital projects now until the cabinet is complete and we know how federal funds will be dispersed going forward.” -- Transportation & Warehousing
“Even though we are reducing our spending and our employment levels, we have a positive outlook for 2025 performance with expected reinvestment of funds.” -- Utilities