As Economy Cools, Price Pressures Show Signs Of Abating

The pace of expansion in the US services sector decelerated in July, the preliminary read on IHS Markit’s gauge suggested.

At 59.8, the headline services print remained robust, but came in well short of the 64.5 the market expected. The range was 62 to 65.5.

“US private sector companies reported a further substantial expansion in business activity during July [but] the rate of growth eased for the second month running to the softest since March, as firms continued to report widespread capacity constraints,” the color accompanying the report read.

The manufacturing gauge beat, printing 63.1. The services index now sits at the lowest since February (figure below).

The composite gauge, at 59.7, still suggests the economy is running hot. Indeed, despite the large MoM decline, the rate of output growth remains “among the fastest recorded over the survey’s 14-year history,” IHS Markit remarked.

Price pressures were evident. Again. The rate of input price inflation was highest on record with two exceptions: Last month and the month before that.

It’s a broken record. “Alongside reports of higher raw material and transportation prices, firms also noted greater wage bills as staff were enticed with higher pay in an effort to reduce backlogs of work,” the report said.

Notably, total employment growth slid to a four-month low, even as firms continued to create jobs. The problem: Labor shortages in the services sector. Recall the figure below.

Generally speaking, IHS Markit struck an upbeat tone, but the color accompanying the provisional PMI reads for July underscored the “peak rate of change” narrative that has some market participants spooked.

“Some moderation of service sector growth in particular was always on the cards after the initial reopening of the economy,” Chris Williamson said. “While the second quarter may therefore represent a peaking in the pace of economic growth according to the PMI, the third quarter is still looking encouragingly strong.”

That may well be the case. Still, businesses flagged a familiar set of lingering concerns, including short-term capacity issues, demand exceeding supply and shortages of both labor and materials.

But that faint glimmer you see could be the light at the end of the tunnel. “We’re seeing signs of inflationary pressures peaking, with both input cost and selling price gauges falling for a second month in July,” Williamson said. Of course, they remained “elevated.”


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