Services Sector Shows Robust Growth — But Prices Are Still Way Too Hot

The crucial U.S. services sector maintained its expansion in November, according to two key survey reports, reinforcing the economy's surprising resilience in the fourth quarter.

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However, the data also highlighted lingering inflationary pressures and a softening labor market, setting a complex backdrop for Federal Reserve policy.

Services Sector Still Expands, But Prices Remain Hot

The ISM Services PMI rose to 52.6 in November, up from 52.4 in October and beating expectations for 52.1. It marked the index's ninth expansion reading of 2025 and its highest level in nine months.

Business activity firmed to 54.5, new orders remained in expansion at 52.9, and supplier deliveries slowed meaningfully, suggesting rising demand and persistent logistical friction.

“The continued expansion in both the Business Activity and New Orders indexes in November, and the highest Backlog of Orders index reading since February 2025 are positive signs of an emerging recovery for the services sector,” said Steve Miller, chair of the ISM Services Business Survey Committee.

But challenges remain. "Tariffs and the government shutdown continue to impact both demand and costs," he added, highlighting slower deliveries tied to air traffic disruptions and tariff-related customs delays.  

A separate reading from S&P Global signaled a solid but cooling services expansion. The S&P Global Services PMI slipped to 54.1, down from 54.8 in October and below the flash estimate of 55.0. Although still signaling expansion, it marked a five-month low.

On the inflation front, prices continued to rise. The ISM Prices Index edged down to 65.4%—its lowest since April 2025—but remains firmly in expansion territory, indicating significant price increases.

S&P Global noted input cost inflation accelerated to a six-month high, driven by higher labor costs and tariffs. Service providers are largely passing these costs to clients.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the combined PMI readings point to roughly 2.5% annualized GDP growth in Q4. He cautioned that an acceleration in service-sector prices "could deter further rate cuts," even as business sentiment improved versus October.

Hiring Still Contracting — Even As Activity Expands

The ISM employment index rose slightly to 48.9, marking its sixth straight month in contraction.

While this is the highest reading since May, it underscores a critical divergence: demand is improving, but firms are still hesitant to add workers.

That picture is consistent with Wednesday's ADP National Employment Report, which showed private employers unexpectedly cut 32,000 jobs in November, reversing the 42,000 added in October and falling short of expectations for soft growth.

A Mixed Picture For The Fed

The latest Services PMI surveys offer a mixed picture for the Fed: activity is firming, demand is improving, and backlogs are rising — but hiring remains subdued, supply chains are slowing, and tariffs continue to lift prices.

Combined with the weak ADP report, the November data reinforce expectations for the Federal Reserve to stay focused on supporting growth. Markets are currently pricing a 90% probability of a December rate cut, with more easing expected in 2026.

The services sector, which accounts for roughly 70% of U.S. economic activity, continues to expand. But the mix of cooling labor demand, persistent price pressures, and policy uncertainty suggests the path forward may remain uneven as 2026 begins.

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Image created using artificial intelligence via Midjourney.