While you can expect high frequency indicators to start reflecting the various lockdown protocols instituted across the US, PMIs aren’t yet showing the same signs of deceleration witnessed across the pond in Europe.
In fact, the November flash read on IHS Markit’s gauge for the world’s largest economy was blistering. The composite index printed 57.9, the best reading since March of 2015.
Services sector activity is all kinds of robust — or so we’re supposed to believe. The flash read on the services gauge for this month was 57.7. The services sector employment gauge hit a record 58.6. That’s the highest in at least 11 years.
Manufacturing fared nearly as well. The flash print for the factory activity gauge was 56.7, the best since September of 2014.
Notably, prices are rising — and fast. Apparently, supply chain problems are becoming acute.
“Firms registered an unprecedented rise in input costs during November, as growing demand for inputs and supply shortages reportedly pushed supplier prices higher,” the color accompanying the survey reads. “Service sector cost inflation hit a survey high and manufacturers’ input costs rose at the sharpest rate for just over two years, with supplier delays more widespread than at any other time in the survey’s 11-year history.”
Invariably, the inflation camp will pounce on this as evidence to support the notion that a rebound in demand could collide with lingering/legacy supply chain issues from the pandemic to drive up input costs, which will ultimately be passed on to consumers.
Chris Williamson, Chief Business Economist at IHS Markit, didn’t mince words.
“The first post-election snapshot of the US economy… makes for very encouraging reading, though stronger economic growth is quite literally coming at a price,” he said Monday. “The surge in demand and hiring has pushed prices and wages higher [as] average selling prices for goods and services rose at the fastest rate yet recorded by the survey, with shortages of supplies also more widespread than at any time previously reported.”
This underscores the pandemic’s Harvey Dent (i.e., Two-Face) character: The biggest demand shock in at least a century was a deflationary supernova by definition, but the virus was also a supply shock in many respects. Some say that side of COVID (the supply shock) could collide with the normalization/reopening process to drive a sharp increase in wages and prices.
While new lockdowns across western economies and the timetable on mass vaccination likely means this is a mid-2021 problem, Williamson’s remarks around the preliminary November PMIs for the US are worth filing away in your mental Rolodex.
“Firms are scrambling for inputs and workers to meet the recent growth of demand, and to meet rising future workloads,” he said.
I suppose this is as good a time as any to roll out one of my favorite quotes from Deutsche Bank’s Aleksandar Kocic. “Through the last four cycles, the Phillips curve has asserted its importance in an unorthodox way and, as such, attained a special status; it inhabits a space different from other macroeconomic frameworks and metrics,” he wrote years ago. “In each cycle, it falls apart, but after every annihilation, it re-composes itself… an equivalent of Cheshire cat’s smile that persists alone, even when the cat’s body is no longer present.”