Activity in the world’s largest economy decelerated this month, preliminary PMIs for September suggested.
Flash reads on IHS Markit’s services and manufacturing gauges were below consensus, albeit just barely.
At 54.5, the composite index fell from August by less than a point. Still, the implied rate of output growth was the weakest in a year.
Although the drop in the services gauge was much less pronounced than declines seen over the previous three months, it still represented a fourth consecutive month of moderation (figure below).
“Though solid, the rate of growth slowed for the fourth month running amid less robust demand conditions and ongoing COVID-19 worries,” IHS Markit said Thursday, adding that “employment levels were broadly unchanged during September, bringing an end to a 14-month sequence of job creation.”
That latter point is notable. The Delta variant torpedoed consumer sentiment in August, and by all indications, continues to impede hiring in the leisure and hospitality sector.
Recall that retail sales at restaurants and bars flatlined last month, while food services lost jobs for the first time since the winter wave (figure below).
Although services firms are still optimistic, the upbeat outlook was predicated on “an end to the pandemic.” Without lapsing into hysterics, I’d gently suggest that COVID probably isn’t going away. Rather, the pandemic is morphing into an epidemic and it’s entirely possible that consumer psychology is forever altered with consequences for economies that rely heavily on consumption in high-contact sectors — economies like America’s.
Cost pressures in the services sector were still elevated this month, IHS Markit said, citing the usual culprits: Soaring supplier prices and higher wage bills. Businesses are being forced to offer “incentives to entice workers” and those incentives are pushing up costs. “Firms sought to pass on higher prices to their clients through a marked rise in output charges,” the report said.
I don’t see much use in dancing around the issue: That continues to sound like a recipe for stagflation. Prices are rising, people aren’t coming back to work, and the resultant labor shortage is forcing employers to offer still more incentives, leading to still more margin pressure, incentivizing still more price increases.
Eventually, people won’t be able to afford higher prices, especially if they aren’t working, which could translate to lower sales at a time when business is already impeded by a dearth of available labor. That’s a rather vicious circular dynamic.
Underscoring all of that was IHS Markit’s Chris Williamson. “The slowdown was led by a cooling of demand in the service sector, linked in part to the Delta variant spread [and although] manufacturers have seen far more resilient demand, factories face growing problems in sourcing enough supplies and labor to meet orders,” he remarked, adding that “the upshot is yet another month of sharply rising prices charged for goods and services as demand outpaces supply, and higher costs are passed on to customers.”
It’s easy enough to suggest that this should be self-correcting. That eventually, higher prices will mean less demand, setting the stage for lower prices until everyone finds a happy equilibrium.
Of course, the world doesn’t work the way textbooks say it does. Equilibrium is everywhere and always elusive, and rarely is it “happy” when you can find it. States of disequilibrium can persist indefinitely.
Future growth at this point is somewhat linked to my favorite metric, which in general is income. As I watch FRED stuff, it’s interesting to keep an eye on per capita income and disposable changes. Right now it seems like the explosive income shocks from Covid are crashing versus fading, which in my mind suggests that inflation issues will also fade. Granted the current bottleneck trends that are lingering will cause inflation to remain elevated, but a decline in income per capita will place a lid on further acceleration.
I quickly read this (related) opinion this morning: “The Goldilocks economy and stock market are dying, Roubini”.
I think he’s dead wrong in his four scenarios, primarily because there will be a strange mix of non-classical outcomes that will provide a new looking equilibrium. Covid produced both supply and demand shocks which will play out in relationships that are nonlinear, versus snapping back into a pre-Covid model. It’s kinda like a shoreline after a tsunami, i.e., the waves may go back to linear waveforms — but the erosion of the shoreline is structurally altered. In that example, a home or building that gets obliterated doesn’t go back to normal, even with insurance. In addition, tsunami dames and structural changes are not necessarily globalized but localized, thus some parts of the economy will decay while other parts increase in value. Very dynamic stuff, as usual.
identidem – love the tsunami beach analogy!
The Fed looks like it is tightening into a slowdown. As far as the supply chain goes, we could see a whiplash here. Demand drops and part of the chain works out. The upside is possibly inventories get built back up, but if it goes too far watch out. Same with the labor force. Employment to population ratio is extremely low. Right now there are 10mm openings and something like 6mm looking for work. But if you more normalize employment to population out of a recession and pandemic there are another 6mm-7mm workers. Coming out of a pandemic is not going to be easy, nor are the economic metrics reliable or typical. Next year is going to be as Confuscious said, “interesting times”.
The other interesting thing that seems to be happening is that the apparently stubborn refusal of millions of workers to return to the “job” is pushing labor market/employers to do what Congress (GOP) does not seem willing to do, raise the minimum wage to $15. It will be interesting to see what higher wages do to personal consumption.