Service sector grows faster than expected in January

REAL ECONOMY BLOG | February 05, 2024

Authored by RSM US LLP

The service sector continued its impressive expansion in January, growing for 43 of the past 44 months, according to the data released by the Institute for Supply Management on Monday.

The overall index posted an upside surprise, rising to 53.4% from 50.5%. Anything above 49% generally indicates an expansion, suggesting that growth accelerated in January as it reached the highest level since September.

The increase was broad-based as most of the subindexes showed positive change. Employment growth rebounded to positive territory, in line with the robust January jobs data released last week.

Part of the rebound could be attributed to the resolution of the United Auto Workers strike in the winter.

For example, one respondent from wholesale trade subsector said that business activity was likely to rebound “after a significant downturn in December, which was likely due to extended plant shutdowns, customer inventory burns and lingering effects from the United Auto Workers (UAW) strike.”

New orders, a proxy for future activity, also picked up the highest level in three months, driven by both export and import orders.

Strong demand, however, pushed prices up on the month, registering the fastest growth since last February. The upside surprise from service inflation deviated from the downward trend of slowing price gains last year.

But this is only one month of data, so we should remain cautious especially when demand is expected to be stronger this year than our previous forecasts.

The takeaway

It’s another reason to believe the Federal Reserve should not rush cutting rates this year. Service prices remain the sticky part of inflation, keeping it from reaching the Fed’s 2% target on a consistent basis.