‘Very Hot’ US Economy Seen Pushing Limits In June

The US services sector cooled in June, the initial read on IHS Markit’s survey for this month suggested.

While still indicative of robust activity (indeed, the survey all but screams “Overheat!”), the flash read, at 64.8, missed consensus by a country mile. The market wanted 70.

The range, from 17 economists, was 68 to 71, so the actual print (figure below) was well short of the most pessimistic guess. It also represented a notable decline from May.

The manufacturing gauge, on the other hand, beat estimates, coming in at a scorching 62.6, up from May and the highest in series history.

The accompanying color flagged familiar dynamics. “Moderations in activity growth were seen in both the manufacturing and service sectors, with goods producers hampered in particular by significant supplier delays and both sectors reporting difficulties finding staff,” IHS Markit said.

Although input cost pressures abated “slightly,” the pace of increases for raw materials and fuel was described as “rapid” by manufacturers. Services providers reported higher labor costs (“wage bills,” as IHS Markit put it).

These costs “were commonly passed on to clients through a steep rise in output charges,” this month, the survey remarked, noting that “the increase in selling prices was the second sharpest since data collection began in October 2009.

The input prices gauge for manufacturing printed 83.8, up from May and the highest ever. Employment gauges dropped in both manufacturing and services, with “numerous panelists” citing trouble locating “suitably trained candidates” for vacancies.

None of this is surprising, but it does underscore the persistence of the factors that are both pushing up prices and constraining the labor market stateside.

I suppose what I’d emphasize is that the longer these factors take to abate, the more difficult it’ll be to describe them as “transitory.”

While there’s some truth to the idea that persistent labor market slack (attributable to employers and sidelined workers trying to agree on adequate compensation in the context of an ongoing economic revamp) could provide some cover for the Fed to remain dovish, the combination of labor market slack and higher consumer prices (as rising input costs are passed along, for example) isn’t the best cocktail.

Below, find the updated “SOTU” chart.

“It’s clear the economy continues to run very hot,” IHS Markit’s Chris Williamson remarked. “Prices charged for goods and services are still rising very sharply, record supply shortages are getting worse rather than better, firms are fighting to fill vacancies and manufacturers’ warehouse stocks are being depleted at a worrying rate as firms struggle to meet demand.”

Draw your own conclusions.


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