US Services Economy "Loses Momentum" As Inflationary Pressure Surges

While better than expectations, Markit Services PMI dropped to 3-month lows at 53.9 in December as input prices soared at the fastest rate since July 2015 "which could feed through to reduced consumption." ISM Services was flat at 57.2 in December, holding at 14-month highs from November, with employment declining despite rising new orders.

The divergence continues but both surveys showed meomentum fading...

Inflationary pressures are building...

Input cost inflation accelerated in December and was the joint-fastest since July 2015. Reports from survey respondents suggested that suppliers had passed on higher fuel and raw material prices.


A number of firms also pointed to increased food costs. Latest data indicated a solid rise in average prices charged by service providers and the rate of inflation was the steepest recorded since June 2015.

ISM Breakdown - note decline in employment and new export orders (strong dollar) as well as surging 'Prices Paid'


ISM Respondents:

"New business slowed a little bit, but we are still growing. The key headwinds are holiday season and capex [capital expenditures] tightening due to end of year budgets." (Construction)


"Steady with optimism." (Finance & Insurance)


"Business is the same and at the same volumes as last month." (Health Care & Social Assistance)


"Very busy end to the 4th Qtr due to customers' year-end spending boost." (Mining)


"Activity seems to be increasing as more potential client inquiries have been coming in." (Professional, Scientific & Technical Services)


"Labor, especially construction labor and construction subcontractors, continue to be in short supply." (Public Administration)


"Sales increasing due to [the] holidays." (Retail Trade)


"Distribution of finished goods ahead of last year and forecasts in all channels. E-commerce [has the] strongest growth." (Transportation & Warehousing)

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

The US economy ended 2016 on a solid footing on which sustained growth looks set to be achieved in the coming year.


“Although losing a little momentum in December, the pace of business activity growth in the services and manufacturing sectors combined remained one of the strongest seen over the past year.


“The surveys signal GDP annualized growth of approximately 2.0% in the fourth quarter, a pace which we expect to be met – if not slightly exceeded – through 2017.


“The upturn also continues to deliver an impressive rate of job creation, especially given the current high level of employment – largely reflecting improved confidence about the economic outlook.


“The only real blot on the copybook was that prices charged showed the steepest rise for one and a half years, which could feed through to reduced consumption.


“The upturn in price pressures alongside the robust economic growth signalled will also add conviction to the belief that, unlike 2015 and 2016, this year will see that Fed deliver more than one rate hike, with three quarter point interest rate rises looking the most likely scenario.”


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