U.S. Services Expand at Fastest Pace Since 2024 as Jobs Data Softens
The U.S. services sector started 2026 on a strong note, reinforcing its role as the main driver of economic growth.
- U.S. services activity remains strong, posting its fastest growth since 2024, with business activity accelerating further in January.
- Hiring is still expanding but only marginally, while price pressures in services remain elevated and sticky.
- Manufacturing showed signs of improvement, but private-sector hiring slowed sharply and key labor data are delayed, keeping the economic outlook mixed.
The ISM Services PMI registered 53.8 in January, extending the expansion streak to 19 consecutive months. In simple terms, PMI readings above 50 signal growth, while readings below 50 indicate contraction. At 53.8, the data show that service-sector activity is not just expanding, but doing so at a relatively fast pace compared to recent years.
This performance suggests that consumer demand for services such as healthcare, finance, travel, and professional services remains resilient, even as broader economic uncertainty lingers.
Business Activity Remains Strong Despite Cooling Demand Signals
Underlying activity within the services sector continued to improve. The Business Activity Index rose to 57.4 in January, up from 55.2 in December. This increase indicates that service providers are seeing higher output and busier operations at the start of the year.
At the same time, the New Orders Index remained in expansion territory at 53.1. While this still signals growing demand, the drop from December’s stronger reading suggests that the pace of new demand has moderated slightly. In practical terms, companies are still receiving new business, but the surge seen late last year has cooled.
Employment Growth Slows but Remains in Expansion
Labor conditions within services show a more cautious trend. The Employment Index came in at 50.3, marking the second month of expansion but only marginally above the 50 threshold. This indicates that service-sector companies are still hiring, but at a slower and more selective pace than in previous months.
The decline from December reflects growing caution among employers, who appear to be balancing ongoing demand with concerns about costs, margins, and the broader economic outlook.
Prices Point to Persistent Inflation Pressure
Inflation remains a notable concern in the services economy. The Prices Index jumped to 66.6 in January, its highest level in recent months and above its 12-month average. A reading at this level means a large majority of firms are reporting rising input costs.
In simple terms, service providers continue to face higher prices for labor, rent, and other expenses, and many are passing those costs on to customers. This reinforces the idea that inflation in the services sector remains sticky and slow to cool.
Manufacturing Shows Improvement Alongside Services Strength
The strength in services is now being joined by signs of improvement in manufacturing. Earlier this week, the ISM Manufacturing PMI showed U.S. factory activity expanding at its fastest pace since 2022. This suggests that the long-running weakness in manufacturing may be easing, adding another layer of support to the broader economy.
Together, the services and manufacturing data point to an economy that is still growing, even if growth is uneven across sectors.
Job Market Signals Mixed as Hiring Slows
Labor market data released this week delivered a more cautious message. The ADP employment report showed that private-sector hiring slowed sharply in January, with just 22,000 jobs added. This was well below expectations and signals that businesses are becoming more careful about expanding payrolls.
Because ADP tracks private employment, the report was released on schedule, unlike some government data that have been delayed.
Government Shutdown Delays Key Labor Data
Several important labor indicators will arrive later than usual. Following a temporary U.S. government shutdown – which was lifted after President Donald Trump signed an executive order – the JOLTS report and weekly jobless claims have been postponed.
As a result, investors and policymakers currently have an incomplete picture of labor market conditions, increasing uncertainty around near-term economic momentum.
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