The US services sector demonstrated unexpected growth in December 2025, as the Institute for Supply Management (ISM) reported its nonmanufacturing PMI climbed to 54.4. This reading surpassed expectations that projected a slip to 52.3, marking strong expansion across a sector that constitutes more than two-thirds of the US economy. Employment also improved, with the services employment index rebounding to 52.0, ending a six-month contraction streak, suggesting improved momentum heading into 2026.

Robust Services Sector Expansion and Employment Rebound

The services industry’s performance in December notably outpaced November’s 52.6 reading, fueled by strong customer demand indicated by new orders rising to 57.9 from 52.9. Although backlog orders declined further and remained subdued, export orders expanded after five months of contraction. The rebound in employment to 52.0 underscores a recovering labor market within the sector, which is crucial given its dominant role in overall economic output. Despite these positives, growth tempered somewhat over the fourth quarter, influenced partly by a 43-day government shutdown and tighter consumer affordability. Nonetheless, the US economy had already experienced its fastest growth in two years during Q3, led by solid consumer spending.

Inflation Pressures and Monetary Policy Outlook

Despite easing slightly from November’s 65.4, prices paid by service providers for inputs remained elevated at 64.3 in December. This suggests persistent inflationary forces, keeping inflation above the Federal Reserve’s 2% benchmark and limiting near-term prospects for cost relief. Against this backdrop, the Federal Reserve is widely expected to maintain interest rates at current levels during its January meeting. Minutes from the Fed’s December 9-10 gathering revealed significant dissent among policymakers over the future path of monetary policy, reflecting uncertainty amid inflation and growth signals.

Looking ahead, the improving services expansion and firming employment point to the US economy closing 2025 on solid footing. Additional support may come from anticipated tailwinds such as President Donald Trump’s tax cuts and easing trade policy uncertainties. However, ongoing inflation pressures and continued declines in backlog orders will warrant close attention from investors and policymakers.

Expansion: Market Outlook

The ISM nonmanufacturing PMI’s jump to 54.4 and the employment index’s recovery to 52.0 in December reflect an unexpected acceleration in US service sector activity. Coupled with a rise in new orders to 57.9, these figures highlight significant expansion in a sector vital to overall economic health. Persistent input cost inflation at 64.3 signals that inflation concerns will remain central in 2026. Consequently, investors and market participants should monitor these inflationary trends and Fed policy deliberations closely, as they will shape sector-specific prospects and the broader economic outlook for the year ahead. The expansion in services, underscored by labor gains and demand strength, positions the US economy for forward momentum amid lingering headwinds.