U.S. Services Sector Expansion in December 2025: A Strategic Opportunity Amid Divergent Economic Trends

The U.S. economy in December 2025 is marked by a stark divergence between the resilient services sector and the struggling manufacturing sector. With the -a 1.8 percentage point increase from November and the strongest reading since October 2024-the services sector has expanded for the 10th consecutive month. In contrast, the , the lowest level since October 2024, signaling a prolonged downturn. This divergence creates a compelling case for sector rotation and thematic investing in services industries, particularly retail, healthcare, and transport, which are outperforming amid manufacturing's challenges.

Services Sector Strength: A Structural Shift

The December 2025 ISM Services PMI highlights robust momentum across key indicators. The , , reflecting strong demand. Notably, the -its first expansion in seven months-indicating a labor market realignment toward services. These metrics underscore a structural shift in economic activity, driven by holiday season demand, end-of-year spending, and the sector's adaptability to inflationary pressures.

The Prices Index, , in November, suggesting moderating input cost pressures. Meanwhile, supplier deliveries slowed, with the , hinting at improved supply chain efficiency. Collectively, these trends position the services sector as a buffer against broader economic headwinds.

Manufacturing Contraction: Policy and Structural Challenges

The manufacturing sector, in contrast, faces a perfect storm of policy-driven and structural challenges. The ISM Manufacturing PMI of 47.9% reflects a 10th consecutive month of contraction, . Tariffs, economic uncertainty, and worker shortages have exacerbated the downturn. For instance, , with only the Computer & Electronic Products industry showing expansion.

Employment in manufacturing continued to contract for the 11th month, with 63% of panelists citing ongoing headcount management. Price pressures remain stubborn, as the Prices Index , reflecting persistent input cost inflation. These dynamics highlight a sector in distress, with recovery requiring sustained policy shifts or demand rebounds.

Sector Rotation Opportunities: Retail, Healthcare, and Transport

The services sector's outperformance is most evident in retail, healthcare, and transport, which are capitalizing on structural trends and strategic investments.

Retail, . This divergence reflects shifting consumer behavior toward e-commerce and omnichannel platforms. The sector's resilience is further supported by the holiday season, which in December sales.

Healthcare: The healthcare logistics market is experiencing a transformative phase, driven by acquisitions and demand for specialized services. UPS's $1.6 billion acquisition of Andlauer Healthcare Group and DHL's purchase of Cryopdp exemplify the sector's strategic consolidation. With the healthcare logistics market , , investors are poised to benefit from long-term structural demand.

Transport: Despite a Logistics Managers Index (LMI) of 36.9-the lowest since October 2021-the transport sector shows pockets of strength. , , reflecting improved freight market dynamics. While capacity constraints persist, the LMI for transportation utilization , indicating gradual recovery.

Strategic Allocation: Capitalizing on Divergence

The data underscores an urgent need for portfolio reallocation toward services sectors with durable growth drivers. Retail and healthcare, in particular, offer exposure to secular trends such as e-commerce adoption and aging demographics. Transport, though cyclical, presents opportunities in logistics innovation and pricing power.

Conversely, manufacturing's contraction-exacerbated by tariffs and labor shortages-demands caution. Investors should avoid overexposure to capital-intensive manufacturing subsectors and instead prioritize services industries with strong balance sheets and pricing resilience.

Conclusion

The December 2025 ISM reports confirm a clear economic divergence: services sectors are expanding while manufacturing contracts. With the services PMI at 54.4% and employment rebounding, the case for sector rotation is compelling. Immediate allocation shifts toward retail, healthcare, and transport-industries with structural growth and policy tailwinds-can position portfolios to capitalize on this asymmetric opportunity. As the manufacturing sector grapples with policy headwinds, the services sector's momentum offers a strategic hedge and a path to outperformance in 2026.