Economic Optimism Grows, But Tariff Concerns Loom
The US services industry saw a significant boost in December, with a sharp increase in expectations for price hikes as businesses worry about the impact of tariffs on inflation. The Institute for Supply Management’s (ISM) services index rose to 54.1%, surpassing economists’ forecasts and indicating a strong growth outlook.
Tariff Fears Drive Price Expectations
The prices index jumped 6.2 points to 64.4%, the highest level since January 2024. This surge is largely attributed to concerns over President-elect Donald Trump’s proposed tariffs, which are expected to take effect later this month. Trump has denied reports of a more targeted approach, fueling uncertainty among businesses.
ISM Manufacturing Survey Reflects Higher Prices
The ISM manufacturing survey also showed higher prices, with the index rising to 52.5%. This increase is likely driven by the same tariff concerns affecting the services sector.
Treasury Yields React to ISM Data
Following the release of the ISM data, Treasury yields, particularly at the longer end of the curve, moved higher. The benchmark 10-year note yielded 4.68%, up 6.5 basis points on the session.
Businesses Express Caution Amid Optimism
While many industries expressed general optimism about the business climate, respondents cited tariffs as a major concern. “There’s a lot of uncertainty about tariffs and purchasing decisions. A lot of wait and see,” said one transportation and warehousing industry respondent.
Employment and Business Activity Indices Rise
The business activity index rose 4.5 points to 58.2%, while employment remained little changed at 51.4%. In contrast, the ISM manufacturing survey showed a decline in employment to 45.3%.
Federal Reserve Watches Closely
The ISM data will be closely watched by the Federal Reserve as it considers future monetary policy moves. The central bank has lowered its benchmark borrowing rate by a full percentage point since September but is expected to move more cautiously now.
Job Openings and Labor Turnover Survey
A separate report from the Labor Department showed job openings rising to 8.1 million in November, while quits fell to 3.06 million. The level of job openings to available workers remained steady at around 1.1 to 1.
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