Key Takeaways

The final December 2025 S&P Global US Services PMI came in at 52.5, below the preliminary reading of 52.9 and a notable drop from November's 54.1. This marks the slowest pace of expansion in eight months. The composite PMI also fell to 52.7 from 53.0 prelim and 54.1 prior. Critically, new business inflows hit a 20-month low, employment growth stalled, and input price inflation accelerated to a seven-month high, largely driven by tariff impacts. Business confidence weakened amid policy uncertainty, painting a picture of an economy where growth is cooling but inflationary pressures remain stubborn.

Dissecting the December Slowdown: From Robust Growth to Emerging Cracks

The final December Services PMI data confirms a significant deceleration in the US service sector's momentum as 2025 drew to a close. The headline index of 52.5, while still above the 50.0 threshold that separates expansion from contraction, represents the weakest reading since April 2025. This decline from the preliminary 52.9 and the prior month's 54.1 is not a statistical quirk but reflects underlying softness in demand. The slowdown was broad-based, with the composite PMI—which combines services and manufacturing—also falling sharply to 52.7. This suggests the cooling is not isolated to one sector but is becoming a more pervasive feature of the economic landscape.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, framed the data as evidence that "the resilience of the US economy is showing signs of cracking." This is a pivotal shift in narrative. For much of 2024 and 2025, the US economy, particularly its vast service sector, defied expectations of a sharper slowdown. The December data, however, indicates that the cumulative weight of higher interest rates, policy uncertainty, and affordability issues is finally beginning to bite more deeply into economic activity.

The Demand Dilemma: New Business at a 20-Month Low

The most alarming signal within the report is the plunge in new business inflows to a 20-month low. Demand is the lifeblood of any expansion, and its sharp weakening points to a fundamental cooling. Williamson highlighted that this softness in services was "accompanied by the first fall in orders placed at manufacturers for a year," confirming a "broad-based weakening of demand growth." For traders, this is a critical leading indicator. Slowing new orders today typically translate into slower business activity and potentially lower corporate earnings in the coming months, which can weigh on equity market sentiment and corporate bond valuations.

Employment Stagnation: A Nine-Month Growth Streak Ends

Another stark development was the stagnation in employment volumes, which ended a nine-month sequence of continuous job growth in the sector. Perhaps more tellingly, Williamson noted that "the number of companies cutting headcounts has exceeded those reporting higher employment for the first time since February." The labor market has been a cornerstone of US economic strength. Any sign of cracking here is closely watched by the Federal Reserve and market participants alike. A softening job market could reduce consumer spending power and increase the Fed's willingness to cut interest rates more aggressively, but it also raises concerns about the overall health of the economy.

The Inflation Conundrum: Accelerating Costs Amid Slowing Growth

In a challenging twist for policymakers, the slowdown in growth is coinciding with a re-acceleration of price pressures. The report showed input price inflation hit a seven-month high, with service providers explicitly citing tariffs as a key driver. In response, these businesses raised their own selling prices at a quicker pace to protect margins. This creates a "stagflation-lite" scenario—slower growth coupled with persistent inflation. Williamson warned of "the unwelcome combination of slower economic growth and stubbornly high inflation at the start of the new year." This dynamic complicates the Fed's dual mandate, potentially forcing it to balance fighting inflation against supporting a cooling economy.

What This Means for Traders

The December PMI report presents a complex, mixed picture that requires nuanced positioning across asset classes.

  • FX (US Dollar): Bearish near-term, potentially bullish medium-term. The immediate reaction to slowing growth and a weakening job market is typically dollar-negative, as it fuels expectations of Fed rate cuts. However, the stickier inflation component could limit the Fed's dovishness. Watch for the dollar to be caught between growth fears and inflation concerns, leading to choppy, range-bound trading until clearer trends emerge from subsequent data.
  • Equities: Sector-specific caution. The slowdown in new business and the margin pressure from rising input costs are headwinds for service-sector earnings. Sectors like consumer discretionary, financials, and technology services may face scrutiny. Defensive sectors or companies with strong pricing power may outperform. The overall market direction will hinge on whether investors focus more on the growth slowdown (bad for earnings) or the increased odds of Fed rate cuts (good for valuations).
  • Fixed Income: Bullish for bonds, but with volatility. Slowing growth and a stalled labor market are classic catalysts for a rally in government bonds (lower yields). However, the inflation component will cap the rally, as it argues against aggressive easing. The yield curve may steepen if the market prices in short-term rate cuts due to growth fears but remains wary of long-term inflation. Monitor breakeven inflation rates in TIPS for clues on inflation expectations.
  • Fed Policy Expectations: The data adds weight to the dovish side of the Fed debate but injects uncertainty. Markets will likely increase the probability of a rate cut in Q1 2026. However, traders should watch for any Fed communication that pushes back by emphasizing the persistent inflation signals in the same report. The Fed's reaction function is now being tested by conflicting data.

Looking Ahead to 2026: Policy Hopes and Affordability Headwinds

The report concludes with a glimmer of hope, noting "an expectation among many companies that lower interest rates and government policy will start to boost demand again as the new year proceeds." This forward-looking sentiment is crucial. Markets are forward-discounting mechanisms, and if businesses believe the worst is near-term and policy support is coming, it could limit the downside for risk assets.

However, the path forward is fraught with the same uncertainties that dampened December's confidence: tariffs and affordability. The explicit mention of tariffs impacting costs is a direct macro risk. Any escalation in trade policy could further fuel input price inflation, squeezing businesses and consumers simultaneously. The affordability issue, cited throughout the survey, speaks to the cumulative impact of past inflation and higher borrowing costs on household and business budgets.

In conclusion, the December Services PMI is a transitionary report. It signals the end of a period of unbridled resilience and the beginning of a more fragile phase for the US economy. For traders, the key themes for early 2026 are now clearly defined: monitoring the tug-of-war between cooling demand and sticky inflation, watching for confirmation of labor market softening in official data, and positioning for a Federal Reserve that must navigate this increasingly difficult economic crosscurrent. The resilience is cracking, but the direction of the break—toward a soft landing, a re-acceleration of inflation, or a sharper slowdown—will be the dominant market narrative of the coming quarter.