US Service Sector Held Strong In December But Omicron Risks And Higher Costs Persist

The U.S. service sector has been a driver of economic expansion during the COVID-19 pandemic, but it is being saddled with higher costs that hinder business activity.

In the IHS Markit U.S. Services PMI Index released Wednesday, analysts noted that the service sector continued to expand as 2021 ended. The seasonally adjusted final IHS Markit U.S. Services PMI Business Activity Index registered 57.6 in December, down from 58.0 in November. The forecast was for a reading of 57.5.

Siân Jones, senior economist at IHS Markit, said business confidence was at its highest since November 2020 with the expectation that supply chain bottlenecks and labor shortages will ease, although firms were still mindful of new risks posed by the Omicron variant of COVID-19.

"The service sector continued to aid overall growth, as the manufacturing sector saw output hampered again by material and labor shortages," said Jones. "The impact of the latter, however, had a burgeoning effect on service providers as job creation rose at only a marginal pace amid challenges keeping hold of staff and enticing new starters."

Throughout the pandemic, the service sector has held firm. Beyond being a consistent source of economic activity, the service sector has also been an engine for new job growth as well. Payment proccessing firm ADP estimated that 807,000 new jobs were created in December, a trend driven by service providers.

Labor shortages, a demand for higher wages from workers and supply costs held down the sector in December. IHS notes that service providers recorded the most sustained pressure on input prices since October 2009 after the Great Recession. The added burden of higher transportation and distribution fees represented an added burden, particularly at a time when an uptick in client demand put further pressure on businesses.

However, there were still positives sprinkled in the latest report. Export orders were stronger than the annual average for 2021 despite a softening of foreign demand.

Service providers also recorded a faster rise in new business during December, as well as the sharpest increase in client demand since July amid new customer acquisitions and contract gains.