Services Surge While Manufacturing Slumps — PMI Reveals a Fractured Economy

The U.S. economy continues to defy expectations. The November 2025 Markit Composite PMI of 54.2, while slightly softer than October's 54.6, remains a testament to the private sector's resilience. This data paints a nuanced picture: a services-driven rebound coexists with manufacturing headwinds, creating a fertile ground for strategic sector rotation. For investors, the challenge lies in capitalizing on growth while hedging against inflationary pressures and waning business confidence.

The Services Sector: A Beacon of Growth

The services component of the Composite PMI has been the standout performer, fueled by a surge in new orders and employment. This aligns with broader trends of consumer spending shifting toward experiences and digital services. Sectors like e-commerce, healthcare, and professional services are expanding at a clip, supported by a labor market that continues to add jobs.

Investors should consider overweighting equities in these areas. For instance, companies like UnitedHealth Group (UNH) and Amazon (AMZN) are benefiting from structural demand. The latter's dominance in cloud computing and logistics positions it to capitalize on the services boom. However, valuations in tech-heavy stocks remain elevated, necessitating disciplined entry points and stop-loss strategies.

Manufacturing: A Tale of Two Metrics

While the manufacturing PMI (48.2) signals contraction, the Production Index's jump to 51.4 suggests pockets of strength. This divergence reflects a sector grappling with demand volatility but maintaining operational efficiency where possible. The key here is to distinguish between cyclical and structural challenges.

Input cost inflation—driven by tariffs and supply chain bottlenecks—remains a drag. However, manufacturers that have optimized supply chains or diversified sourcing (e.g., Caterpillar (CAT) or 3M (MMM)) could outperform. Investors should focus on firms with pricing power and strong balance sheets to weather margin compression.

Risk Management: Navigating Inflation and Uncertainty

The PMI data underscores a critical risk: persistent cost pressures. With the manufacturing Prices Index at 58.5 (14th consecutive month of expansion), inflation remains embedded in the economy. This necessitates a dual approach:

1. Hedge Against Inflation: Commodities (e.g., copper, energy) and inflation-linked bonds (TIPS) can offset rising input costs.
2. Diversify Exposure: A balanced portfolio with a mix of growth (services) and value (commodities) stocks can mitigate sector-specific shocks.

The Future Output Index's decline to a three-year low also signals caution. Investors should avoid overleveraging in sectors with fragile demand, such as industrial equipment or luxury goods, until clarity emerges on trade policies and global demand.

Conclusion: Strategic Rotation in a Polarized Economy

The U.S. economy is a mosaic of contradictions: services thrive while manufacturing falters, growth persists amid cost pressures. For investors, the path forward lies in agile sector rotation—leaning into services while selectively picking undervalued manufacturing plays—and rigorous risk management.

In this environment, patience and discipline are paramount. Positioning for the next phase of the economic cycle means staying attuned to PMI signals and adjusting allocations accordingly. The resilient U.S. economy offers opportunities, but only for those who navigate its complexities with both vision and vigilance.