Have you ever felt like the economy was finally hitting its stride, only to see fresh data throw cold water on that optimism? That’s exactly the vibe from the latest preliminary purchasing managers’ index readings for December. Just when many were betting on sustained strength heading into the new year, both manufacturing and services sectors showed unexpected weakness.
It’s the kind of report that makes you pause and wonder if we’re at an inflection point. Growth isn’t collapsing by any means, but the momentum clearly softened. Let me walk you through what the numbers are really saying and why they matter more than the headlines suggest.
A Clear Slowdown in Key Economic Indicators
The flash PMI numbers – those early estimates that give us a sneak peek before final revisions – painted a decidedly cooler picture of the US economy this month. Manufacturing activity slipped to its lowest level in five months, while the much larger services sector dropped to a six-month low. These aren’t dramatic plunges, but they’re meaningful when you consider how resilient both sectors have been lately.
In my view, the composite index tells the broader story best. It fell noticeably from November’s reading, landing at a level that still signals expansion but at a markedly slower pace. We’re talking about the weakest overall reading since mid-year. That’s not panic territory, yet it’s hard to ignore when you’ve grown accustomed to stronger numbers.
Manufacturing Takes a Step Back
The factory side of the economy has been one of the brighter spots in recent reports. Output kept rising, which is encouraging, but new orders actually declined for the first time in a year. That’s a red flag. When companies produce more than they’re selling, inventories build up, and eventually production gets cut back to match demand.
I’ve seen this pattern before – it’s classic late-cycle behavior. Businesses remain optimistic enough to keep lines running for now, hoping demand picks up. But if orders stay soft, those adjustments come sooner than later. The December drop in new manufacturing orders was particularly sharp heading into the holiday season, which isn’t what you’d expect during a normally robust period.
Perhaps the most interesting aspect is how manufacturing held up better than services overall. The sector’s PMI stayed in expansion territory, just barely. Companies reported ongoing output growth despite weaker sales, suggesting they’re working through backlogs or building stock. Sustainability is the question mark here.
Services Sector Loses Steam
Services employ far more people and drive the bulk of economic activity, so weakness here carries extra weight. The preliminary reading showed one of the slowest months for new business growth since early 2023. That’s striking when you think about consumer-facing industries heading into peak holiday spending season.
Growth didn’t stall completely, but it slowed dramatically. Companies across retail, hospitality, professional services – all reported softer inflows of work. Some of this could be seasonal caution, with businesses and consumers holding back amid uncertainty. But the breadth of the slowdown suggests something more structural might be at play.
The recent economic growth spurt appears to be losing steam as we close out the year.
Chief Business Economist commentary
That assessment feels spot on. The services slowdown accompanied a near-stalling of new sales growth, especially sharp in the lead-up to holidays. Firms simply aren’t seeing the order books fill up like they expected.
What the Composite Picture Reveals
Stepping back, the overall composite output index provides the cleanest view of private sector health. December’s flash reading pointed to annualized GDP growth around 2.5% for the fourth quarter – respectable, but down from recent hotter pace. More importantly, it’s the second consecutive monthly decline.
We haven’t seen contraction yet. Output has expanded for 35 straight months, which is impressive durability. But the trend is clearly moderating. When both major sectors weaken simultaneously, it’s harder to dismiss as noise.
- Composite PMI at lowest since June
- Second straight month of deceleration
- Growth remains solid but momentum fading
- Broad-based softening across sectors
These bullet points capture the essence. Robust? Yes. Unstoppable? Clearly not.
US Still Outperforming Global Peers
One silver lining – and it’s an important one – is America’s relative strength. While domestic PMIs cooled, they remain comfortably above readings from Europe, Asia, and most developed markets. The gap has actually widened in recent months.
This exceptionalism has been a defining theme. US businesses report better demand conditions, easier financing, and stronger confidence than counterparts abroad. Even with December’s dip, that advantage persists. It’s a reminder not to overreact to one softer report when the global context remains challenging.
Still, relative outperformance doesn’t make you immune to domestic slowdowns. If global weakness persists, it eventually weighs on US exports and multinationals. The buffer exists, but it’s not infinite.
Rising Costs and Inflation Concerns Return
Perhaps the most alarming part of the report wasn’t the growth slowdown – it was the sharp jump in cost pressures. Input price inflation hit its highest level since late 2022. Companies passed much of those costs through to customers, resulting in one of the steepest selling price increases in three years.
This resurgence of inflation signals comes at an awkward time. Just as growth moderates, pricing power strengthens. Firms widely cited tariffs and trade policy uncertainty as key drivers pushing costs higher. Initially concentrated in manufacturing, the impact now spreads to services – broadening the problem significantly.
Higher costs are increasingly blamed on trade policies, with effects now spilling over from goods to services.
The timing couldn’t be worse. Consumers already face affordability challenges, and businesses worry about demand destruction if prices rise too quickly. This reacceleration of inflation metrics complicates the outlook considerably.
Hiring Slows Amid Uncertainty
Another telling detail: employment growth moderated sharply. Companies restricted hiring in response to softer demand and rising costs. While job creation remained positive, the pace slowed to among the weakest in years.
This caution makes sense. When new orders weaken and costs surge, preserving margins becomes priority one. Headcount decisions get scrutinized more closely. We’ve seen this movie before – hiring freezes often precede broader retrenchment if conditions deteriorate further.
- Weaker new business inflows reduce need for expansion
- Rising costs squeeze profit margins
- Uncertainty prompts conservative staffing approach
- Confidence in outlook dims accordingly
The sequence feels familiar. Labor markets remain tight historically, but cracks are appearing at the margins.
Hard Data vs Soft Data Divergence
One of the more puzzling aspects lately has been the disconnect between survey-based “soft” data and actual “hard” numbers like spending, production, and employment. Recent months showed PMIs softening while official statistics remained firm.
December’s report widens that gap further. Hard data continues showing resilience – solid consumer spending, decent industrial production, low unemployment. Yet business sentiment and forward-looking indicators weaken.
Which side wins out? History suggests hard data leads eventually, but surveys often provide earlier warnings. The current divergence bears watching closely. If soft data keeps deteriorating while hard numbers hold up, confidence could erode further.
Looking Ahead to 2026
The million-dollar question: does this mark the beginning of a more pronounced slowdown? Early signs point to potential further softening as we enter the new year. New sales growth waning sharply into holidays doesn’t bode well for first-quarter momentum.
Manufacturing may need to cut production if demand doesn’t revive. Services face ongoing affordability pressures from rising costs. Business confidence has dipped, leading to cautious hiring and investment plans.
In my experience, these transitional periods often feel gradual until they don’t. The economy rarely shifts gears abruptly. But when multiple indicators align – slower growth, weaker orders, rising costs, cautious hiring – the risk tilts toward continued moderation.
That said, recession isn’t the base case. The underlying expansion remains intact, supported by healthy consumer balance sheets, strong corporate profits, and accommodative financial conditions. But the margin for error has narrowed.
Key Takeaways for Investors and Businesses
So what should we make of all this? A few thoughts worth considering:
- Growth is slowing but not stalling – stay invested but selectively
- Inflation pressures reemerging as a key risk factor
- Sector rotation may favor areas less exposed to cost pressures
- Monitor incoming data for confirmation of trend
- Relative US strength remains a supportive backdrop
The December PMI report serves as a timely reminder that economic cycles don’t move in straight lines. Momentum can fade even when fundamentals appear sound. Staying nimble and reading the incoming signals carefully feels like the right approach heading into 2026.
We’ll get final revisions soon, plus fresh hard data prints. Those will help clarify whether this softening proves transitory or something more persistent. For now, the message seems clear: the post-pandemic growth surge is maturing, and the next phase may bring more modest expansion alongside sticky inflation pressures.
It’s fascinating how quickly narratives can shift. Just weeks ago, the talk was all about sustained strength and soft landing success. Now we’re parsing signs of deceleration. That’s markets for you – always forward-looking, always adjusting. The December PMIs just gave us plenty to adjust to.
One final thought: these survey reports capture sentiment as much as activity. When businesses pull back on hiring and express cost concerns, it often becomes self-fulfilling to some degree. Confidence matters enormously in economic outcomes.
The US economy has proven remarkably resilient these past few years. Whether that resilience holds through another transitional period remains to be seen. But reports like this December PMI reading ensure we’ll be watching every new data point with heightened interest.
After all, understanding these shifts early often separates successful navigation from getting caught wrong-footed. The data is speaking – the question is how loudly we’ll need to listen in the months ahead.
