The US Economy Is Good, Bad And Ugly

There was good news, bad news and ugly news in the preliminary IHS Markit PMIs for the US on Monday.

The good news is, the flash read on US manufacturing beat estimates, printing 51 versus the 50.3 economists were looking for. That’s a relief considering ISM fell into contraction in August and, more germane on Monday, considering how bad things looked across the pond.

The bad news is, the services gauge missed, printing 50.9 versus expectations for 51.4. Here’s Chris Williamson, Chief Business Economist at IHS Markit:

Key to the recent deterioration has been a further spill-over of the trade-led slowdown in manufacturing to the service sector. Inflows of new service sector business almost stalled in September to register the smallest rise since the survey began in 2009. A ray of light comes from manufacturing reporting some easing of headwinds, though factory conditions likewise remained among the toughest since 2009 to underscore the broad-based nature of the current lassitude.

Broadly, the composite gauge barely outpaced estimates, coming in at 51 (expected 50.7). That’s a two-month high, but generally speaking, the recent drop-off doesn’t bode well for the overall “MAGA miracle” narrative.

“Although picking up slightly, the overall rate of growth in September remained among the weakest since 2016, commensurate with GDP rising in the third quarter at a subdued annualized rate of approximately 1.5%”, Williamson remarked.

Now for the really bad (i.e., the “ugly”) part.

The services employment gauge fell to 49.1 in September, from 50.4 last month. That’s the worst print since December of 2009 and it seemingly suggests that the dreaded “manufacturing —> services —-> labor market” domino effect might have started for the US economy.

“Mirroring the trend for the private sector as a whole, latest data indicated the slowest rise in new work since the survey began in October 2009”, IHS lamented.

This is a bad omen for nonfarm payrolls going forward. As Danske points out all the time on Twitter, a plunging employment PMI is a harbinger of a decelerating overall labor market. The composite employment gauge printed 49.4 for September. “In the US, PMI composite employment subindex is now below 50, indicating employment growth may have fallen below the breakeven growth rate of ~100,000 per month”, the bank said, deploying a cringing emoji and a series of yellow caution signs to drive home the point.

“Jobs are now also being cut across the surveyed companies for the first time since January 2010, as firms have become more risk averse and increasingly eager to cut costs”, IHS’s Williamson warned.

This is ominous considering bulls have been hanging their hats on the strength of the US consumer. Retail sales have risen for six consecutive months, and optimists have pointed to the still decent ISM non-manufacturing gauge as evidence that last month’s contractionary manufacturing print isn’t something to get too worked up over.

The problem, as shown in the bottom pane, is that the trend in nonfarm payrolls isn’t great, and neither is the recent collapse in sentiment, with the latter likely to manifest itself in decreased spending at some point, barring an improvement in the trade narrative.

You can draw your own conclusions.