Markit's preliminary reading on U.S. service industries for December shows a sector considerably weaker than expected.
The British econometrics firm's purchasing managers' index (PMI) came in at 53.7 for December, well below the 56.0 consensus estimate and November's 56.1 score. It was the weakest measure in 12 months and follows the firm's manufacturing index which at 51.3 in December was also far below the 52.6 forecast, Novembers' 54.0 result and was the lowest tally since November 2014.
U.S. service companies comprise upwards of 85 percent of the American economy. This sector has been performing relatively well despite the prolonged slump in manufacturing and had been expected to keep GDP near 2.0 percent in the fourth quarter.
Manufacturing exports have been hurt by the strong dollar and global economic slowdown that has hit in China, Japan, emerging markets and Europe at the same time.
New orders in services dropped to their weakest level since January 2015 and the employment index declined. The measure of business expectations for the year ahead plunged to its lowest since August 2010.
"A lack of inflationary pressures, slowing growth and a drop in business confidence to a five-year low are all disappointing news for an economy which has seen the first U.S. interest rate hike for almost a decade," wrote Markit chief economist Chris Williamson in the comments accompanying the release.
"The Fed projections point to a further four quarter point hikes in 2016, but with data as weak as these, we’re likely to see a far less aggressive rate hike progression," noted Mr. Williamson.
"The survey data are consistent with gross domestic product rising at an annualized rate of 1.8% in the fourth quarter. That’s down only slightly from the 2.1% pace observed in the third quarter, but the survey shows a more severe slowing towards the end of the fourth quarter, with an annualized GDP growth rate of just 1.4% indicated for December alone," said Mr. Williamson.
Annualized U.S. GDP growth for the first three quarters has been 2.2 percent. The Atlanta Federal Reserve's GDPNow model had the expansion continuing at a 1.9 percent pace in the fourth quarter in its latest estimate on December 16th. But with the service sector now joining manufacturing industries in relative decline, it is likely that final quarter projections will be revised down.
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