U.S. Services Sector Activity Slows

WASHINGTON (Reuters) – U.S. services sector activity unexpectedly slowed in January amid cooling demand, helping to curb price growth.

The Institute for Supply Management (ISM) reported that its nonmanufacturing purchasing managers index (PMI) fell to 52.8 in January from 54.0 in December, while economists had predicted a rise to 54.3.

A PMI above 50 indicates growth in the services sector, which represents over two-thirds of the economy. The ISM links a PMI reading above 49 with overall economic expansion. Domestic demand was strong in Q4, fueled by robust consumer spending.

The ISM’s new orders measure decreased to 51.3 from 54.4 in December, contributing to a decline in the prices paid for services inputs, which dropped to 60.4 from 64.4 in December—the highest reading since February 2023.

This offers a hopeful sign after recent progress in lowering inflation to the Federal Reserve’s 2% target stalled. However, the inflation outlook remains uncertain as President Donald Trump’s administration pursues tariffs against trade partners and mass deportations, which economists warn may raise prices for Americans.

On Monday, Trump suspended a 25% tariff on Canadian and Mexican imports until next month, while a 10% levy on Chinese goods took effect on Tuesday.

The U.S. central bank maintained its overnight interest rate in the 4.25%-4.50% range last week, having reduced it by 100 basis points since September, when the easing cycle began. The Fed hiked the policy rate by 5.25 percentage points in 2022 and 2023 to combat inflation.

In January, the survey indicated that services employment rose to 52.3 from 51.3 in December. This measure has not reliably predicted services payrolls in the government’s employment report, set to release on Friday.

Nonfarm payrolls are expected to have increased by 170,000 jobs in January, following a surge of 256,000 in December, while the unemployment rate is anticipated to remain stable at 4.1%.