US Services Surge as Manufacturing Hits a 55-Month Low in December

US Services Surge as Manufacturing Hits a 55-Month Low in December 

Europe's latest PMI data presented a mixed scenario, with the manufacturing sector facing steeper contractions, while services showed resilience, helping to stabilize composite indices in key economies like France, Germany, and the UK. Despite this support from the services sector, the overall picture remains one of contraction across the board. Meanwhile, attention has turned to the United States, where S&P Global released its preliminary December PMI data earlier today. The expectations were for modest declines in both the manufacturing and services sectors, but the results provided a stark divergence.

US Manufacturing PMI saw a significant drop, falling to 48.3 from its previous 49.7 reading, and coming in below even the most pessimistic forecasts. On the other hand, US Services PMI surprised to the upside, climbing to an impressive 58.5 from 56.1, far exceeding expectations. This dramatic divergence highlights the increasingly dual-speed nature of the US economy, with manufacturing struggling under various pressures while services thrive.

The disparity between these two sectors has been unfolding even as 'hard' economic data—actual measurable outcomes like employment figures or production levels—has shown consistent outperformance relative to expectations in recent months. According to Bloomberg, the latest services survey reached a 38-month high, underscoring the sector's strength, while US manufacturing output hit a 55-month low, illustrating its ongoing challenges.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, offered his insights on the preliminary PMI figures. He noted that the services sector in the US is experiencing a significant boom, with output growth at its sharpest rate since the economy began reopening from COVID-19 lockdowns in 2021. This rapid expansion in services is contributing to overall economic growth at its fastest pace in nearly three years. Williamson estimates that this momentum aligns with an annualized GDP growth rate of just over 3% for December, reflecting a robust economic trajectory as the year concludes.

However, the picture is starkly different in the manufacturing sector, where output continues to decline at an accelerating pace. Weak export demand is a significant factor behind this downturn, highlighting the global nature of the manufacturing slowdown. Yet there is a silver lining: business confidence regarding the 12-month outlook has risen to a two-and-a-half-year high. This optimism suggests that the broader economic upswing could extend into the new year, potentially becoming more balanced across different sectors.

Williamson also highlighted a nuanced shift in sentiment within the manufacturing industry. While post-election optimism had initially buoyed confidence, concerns have emerged over tariffs and their potential inflationary effects. Specifically, the cost of imported materials is rising, adding pressure to manufacturing operations. December witnessed a sharp spike in raw material prices, driven by supplier-led price increases and higher shipping costs. This trend reflects an increasingly active supply chain environment as businesses prepare for the possibility of heightened protectionist policies in the coming year.

The contrasting trajectories of the manufacturing and services sectors underscore the complexity of the current economic landscape. While the services sector's robust performance is a boon for overall growth, the manufacturing sector's struggles could pose a drag if conditions do not improve. As businesses navigate challenges ranging from rising input costs to global demand shifts, the coming months will reveal whether the optimism in forward-looking indicators translates into more broad-based economic stability.