US service sector expands at fastest pace since September as holiday season lifts activity

• The Institute for Supply Management's gauge of the US services sector unexpectedly jumped to 57.2 in December from 55.9 despite soaring COVID-19 cases and partial lockdowns.
• The reading is the highest since September and marks seven consecutive months of gains for the index. Economists surveyed by Bloomberg expected the gauge to fall to 54.5.
• Improvements in supplier deliveries and business activity fueled the jump. ISM's gauge of employment entered contraction territory, sliding 3.3 points to 48.2.
• "Momentum has faded since the initial summer rebound," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said, adding he doesn't expect significant increases until coronavirus restrictions are reversed.

A top gauge of the US service sector unexpectedly improved in December as the holiday season brought an influx of new orders and boosted business activity.

The Institute for Supply Management's services index climbed to 57.2 from 55.9 last month, according to a Thursday press release. The reading is the highest since September and marks seven straight months of growth for the sector. Economists surveyed by Bloomberg expected the index to dip to 54.5.

Readings above 50 indicate sector growth, while those below the threshold signal contraction. The gains were primarily driven by a 5.8-point improvement for ISM's supplier deliveries index. The association's gauge of business activity jumped 1.4 points to 59.4. ISM's measure of employment entered contraction territory for the first time in four months, dropping 3.3 points to 48.2.

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"We were braced for declines in all the activity components, so the report overall is not as bad as we hoped," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said. "But momentum has faded since the initial summer rebound, and we expect no further material improvement until COVID restrictions have been substantially eased."

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Four industries including arts and entertainment, food services, and real estate reported contraction through December. The remaining 14 service industries tracked by ISM reported growth.

The increase comes despite a sharp increase in US coronavirus cases throughout the month. The surge in infections prompted several state and local governments to impose strict economic restrictions. Lockdown measures disproportionately affect service businesses, and several ISM survey respondents cite the worsening pandemic for their gloomier outlooks. "Starting to see demand weakening as states go back to shut down. Will look to see business resume in late first quarter, as vaccine distribution takes place," one respondent said.

The pandemic is weighing less heavily on US factories. ISM's manufacturing index rose to 60.7 last month from 57.5, according to a Tuesday release. The gauge was primarily bolstered by a pickup in employment and production.

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