WASHINGTON (Reuters) - The U.S. services sector slowed considerably in December, with a measure of employment dropping to the lowest level in nearly 3-1/2 years, a survey showed on Friday.
The Institute for Supply Management (ISM) said that its non-manufacturing PMI fell to 50.6 last month, the lowest reading since May, from 52.7 in November. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the index little changed at 52.6.
Demand for services initially surged as Americans resumed normal lives after COVID-19 lockdowns. But momentum has ebbed, with spending swinging back to goods. Spending on goods far outpaced outlays on services in the third quarter.
A measure of new orders received by services businesses dropped to 52.8 last month from 55.5 in November. Export order growth also slowed considerably. Services inflation remained elevated, with a measure of prices paid for inputs by businesses slipping to 57.4 from 58.3 in the prior month.
Nonetheless, inflation has been cooling, with prices as measured by the personal consumption expenditures price index falling on a monthly basis in November for the first time in more than 3-1/2 years.
That, together with easing labor market conditions, has lead financial markets to expect that the Federal Reserve will start cutting interest rates as soon as March.
The U.S. central bank held rates steady last month and policymakers signaled in new economic projections that the historic monetary policy tightening engineered over the last two years is at an end and lower borrowing costs are coming in 2024. Since March 2022, the Fed has hiked its policy rate by 525 basis points to the current 5.25%-5.50% range.
The ISM survey's measure of services sector employment plunged to 43.3 last month, the lowest level since July 2020 when the economy was reeling from the first wave of the pandemic. The index was at 50.7 in November.
However, earlier on Friday, the Labor Departments payrolls report for December said U.S. employers hired more workers than expected while raising wages at a solid clip.
Back in November, the ISM noted that companies reported losing employees "due to normal attrition and are having issues backfilling these positions." Companies also said "the labor market remains very competitive," and reported "trying to get to full staff levels."