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Washington: The dominant services sector in the United States contracted for the first time in two years in December, data showed on Friday, while business activity declined.
The Institute for Supply Management’s index of services fell below the 50 percent threshold, indicating a contraction that surprised economists.
The sector contributes to two-thirds of the largest economy in the world and has remained resilient despite the Federal Reserve’s campaign to ease demand and control inflation, but it seems that the impact of higher interest rates is starting to appear.
Anthony Nevis, head of the Survey Committee at the Institute for Supply Management, stated that the services index “ended a 30-month period of growth, recording contraction for the first time in two consecutive months, with readings of less than 50 percent in April and May 2020.”
The rate recorded in December was 49.6 percent, while the indicators of commercial activity and new orders declined.
While supplier deliveries were faster in December as logistical problems eased, “hiring contracted as a result of a combination of declining employment due to economic uncertainty and an inability to fill vacancies,” Nevis said.
“The holiday season contributed to the continued growth of commercial activity, albeit at a slower pace,” he added.
According to the institute’s survey, the respondents’ comments pointed out that “high interest rates for mortgages have led to a significant slowdown in sales,” while orders declined or were cancelled, in some cases.
He added that the real estate and entertainment sectors were among the sectors that recorded a decline in new orders last month.