Services sector growth remained intact to finish 2026, according to the new edition of the Services ISM Report on Business, which was released today by the Institute for Supply Management (ISM).
The December Services PMI, at 54.4 (a reading above 50 represents expansion and below 50 indicates contraction), was up 1.8% over November, growing, at a faster rate, for the third consecutive month.
The December reading is 2.7% above the 12-month average of 51.7, and marks the highest reading over that period, with May 2025’s 49.9 marking the lowest.
ISM reported that 11 of the services sectors it tracks saw growth in December, including: Retail Trade; Finance & Insurance; Accommodation & Food Services; Transportation & Warehousing; Arts, Entertainment & Recreation; Mining; Health Care & Social Assistance; Information; Wholesale Trade; Public Administration; and Utilities. Sectors seeing contraction included: Management of Companies & Support Services; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Educational Services; and Construction.
The report’s subindexes that factor into the PMI largely saw gains, including:
- Business Activity/Production, at 56.0, up 1.5%, growing, at a faster rate, for the third consecutive month, as well as topping the 54-mark for the eighth time in 2025 and representing the highest reading since December 2024’s 58 reading, with nine sectors seeing an increase in business activity;
- New Orders, at 52.9, fell 3.3%, contracting, at a slower rate, for the sixth consecutive month (and expanding in 33 of the last 35 months), with 12 sectors reporting growth;
- New Orders, at 57.9, were up 5.0%, growing, at a faster rate, for the seventh consecutive month (and expanding in 34 of the last 36 months), for its highest reading since coming in at 59.1 in September 2024, with nine sectors reporting growth;
- Employment, at 52.0, saw a 3.1% gain, returning to growth after contracting in December, with seven sectors reporting growth; and
- Supplier Deliveries, at 51.8 (a reading above 50 indicates slower deliveries), down 2.3 from November, slowing, at a slower rate, for the 13th consecutive month, with seven sectors reporting slower deliveries
Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs and business conditions again receiving a fair amount of attention.
“We continue to experience higher prices, primarily due to the impact of the administration’s trade and tariff policies,” said an Accommodation & Food Services panelist. “We are disproportionately impacted by importing seafood from Southeast Asia and coffee from South America.”
And a Public Administration panelist cited continuing uncertainty and apprehension regarding tariffs and the resulting impact on pricing.
In an interview with LM, Steve Miller, Chair of the ISM Services Business Survey Committee, said that in December there was a lot of commentary around seasonality that was consumer-related and also getting ready for first quarter 2026 business activity, particularly for the Arts sector in preparing for its first quarter peak season. And he noted a second piece was budgets and spending of budgets at the end of 2025, from customers and also internally. As for the third piece, he said it was related to spending budgets, for things like healthcare flexible spending accounts and the flu vaccine not being effective, as seen in this winter’s high number of flu cases.
A notable reading in the December report was the 5.0% gain for New Orders.
“With Backlog of Orders [down 6.5% in December, to 42.6] being so wonky, in looking at that number and the New Orders number, there is an ongoing trend, or a sawtooth in both cases, in that when New Orders are down, backlog is up, and when orders are up, backlog is down,” he said. “That is what we are continuing to see.”
As the New Year kicks off, Miller said it helps to look at the 2025 overall growth number, at 51.7, which he described as weak overall.
That comes with the caveat that the average, when taking into account the lower Services PMI readings in the summer months, that 2025 average is lowered, coming in at its second-lowest 12-month trailing average.
“But if you look at the average Services PMI for Q4 2025, it is tied with the second-lowest Q4 average rate we have had in the last 10 years, which has been positive for that whole time,” he said. “The trend looks great since May [which came in at 49.9], though, and it looks like it is building confidence.”
When asked about the looming Supreme Court decision, regarding the legality of the White House’s IEEPA tariffs, Miller noted that, on a general level, to the extent that some services economy output being driven by manufacturing activity could drive additional business for services.
“Overall, we did not see a huge negative impact,” he said. “We’ve seen a positive trend line since May in each of the report’s four sub-indexes. We did not see a negative impact, unless maybe muted growth could have been a tariff-related impact and then without the tariffs we are going to see more significant growth. But there was not commentary indicating that were it not for tariffs, there would be major growth occurring. Regardless of the court ruling, I am not expecting a tremendous impact on the services sector, as it has been fairly muted.”
