US Service Sector Slows, Fed Rate Cuts Expected in March

Summary

  • After COVID-19 restrictions were lifted, the demand for services initially rose rapidly in the US as normal life resumed.
  • However, spending has returned to goods from services, with more expenditure recorded in the third quarter.
  • New orders for service businesses dropped to 52.8 in December 2022, as compared to 55.5 in November the same year.
  • The inflation rate in the service sector remains high, although the overall inflation has been subsiding.
  • The Federal Reserve has kept interest rates steady, signaling a potential reduction in borrowing costs in 2024.
  • Challenges with staffing have been reported, with the ISM survey showing a significant dip in services sector employment last month.

Dynamics of Service Demand

As people across America resumed their routine activities after being confined due to the pandemic, the demand for different services initially skyrocketed. However, the trend shifted over time, and the spotlight returned to goods, with the expenditure on goods notably exceeding that on services in the third quarter.

The Inflation Puzzle

New orders taken by services companies fell to 52.8 in December from 55.5 in the earlier month. A significant decline in export order growth was observed as well. Despite this, the rate of inflation in services remained high. However, there was a slight dip in the prices businesses paid for inputs, falling to 57.4 from 58.3 in November.

Central Bank and Interest Rates

Despite inflationary pressures, the overall inflation measured by the personal consumption expenditures price index fell in November, marking a first in over three and a half years. Consequently, the easing labor market and inflationary trends have started influencing financial markets, leading them to speculate that the Federal Reserve may begin cutting interest rates as early as March.

Employment in the Services Sector

On a contrasting note, the employment index for the services sector saw a significant downtrend, recorded at 43.3 in December, its lowest since July 2020. This reflects the struggle companies face in backfilling positions due to the current staff shortage despite reported hiring and salary hikes in December.

As revealed by the ISM in November, firms are facing challenges due to usual attrition, and the labor market continues to be highly competitive. Hence, enterprises have been focusing on reaching their full staffing capacities.

The Possible Impact on Forex Trading

This shift in consumer preference from services to goods coupled with fluctuations in inflation and employment could influence the forex trading market, potentially affecting the value of the US Dollar.

PIP Penguin
Logo