US services sector activity was more robust than anticipated in early October.
Or something. It’s hard to say these days. Especially when assessing the situation entails interpreting anecdotes and otherwise extrapolating from PMIs.
For whatever it’s worth, though, the flash read on IHS Markit’s services sector gauge for this month was 58.2 (figure below), well ahead of the 55.2 consensus expected. The highest estimate from 17 economists who ventured a guess was 56.
“US private sector businesses recorded a sharp and accelerated upturn in output led by the service sector during October, with growth the strongest for three months, albeit still much weaker than seen earlier in the year,” IHS Markit said.
At 59.2, the flash manufacturing print for this month was slightly below estimates. The composite gauge stood at 57.3.
Not surprisingly, the upturn in the services gauge was attributed to receding Delta variant fears. Employers in the services sector added jobs at the fastest pace in four months, even as respondents continued to have difficulties filling vacancies.
Needless to say, capacity constraints are acute. “Firms were struggling to cope with growing sales due to labor issues and supplier delays,” the color accompanying the survey said. Backlogs piled up at the fastest rate in a dozen years of data.
If you’re wondering whether cost pressures abated, the answer is a resounding “no.” In fact, input prices rose at the second-fastest pace ever (with May marking the peak) amid higher transportation costs, wages, supplier fees and material prices. In an effort to protect margins, service providers raised their own average selling prices for a seventeenth consecutive month.
The latest sentiment data continues to suggest inflation worries are weighing on consumer psychology (figure below).
Factories, meanwhile, simply can’t meet demand. “Production remains plagued by constraints,” IHS Markit’s Chris Williamson remarked, adding that “prices paid by factories for raw materials rose at yet another new record pace, in turn feeding through to both higher prices at the factory gate and spilling over into higher service sector prices.”
In short, the world’s largest economy was off to a good start in the year’s final quarter, but there’s no evidence that various bottlenecks, disruptions and distortions are set to fade anytime soon.
That, in turn, casts further doubt on the “transitory” narrative, which is under siege.
Five-year breakevens topped 3% for the first time ever this week (figure above).
Commenting further on Friday, Williamson said simply, “The upward rise in inflationary pressures shows no signs of abating.”
people aren’t grasping just how bad the holiday shopping season will be. Everyday people don’t think in terms of supply chains. Labor/Consumers are already angry and sad. Colder weather and empty shelves/longer wait times will compound the frustration. This will be one for the record books in terms of the disappointment on retail sales.
The supply issues we are currently experiencing are ultimately down to the now entrenched strategic approach used by most US and large foreign firms of so-called “lean manufacturing.” When properly applied on a calm economic sea the result is a nice stream of growing profits, although sadly no growth in real wages. But as we are wont to say, “no pain no gain” so sorry workers you lose. But now our economic sea looks like a storm in Alaska and our economy is an unfortunate crab fishing boat. Any disturbance to the calm under lean manufacturing can cause terrible consequences because all the slack and reserves of money, goods, labor, what have you, is gone from the system and must be rebuilt. I expect most of this will take years. As for inflation, I don’t think transitory is realistic. We are short many tens of thousands of truck drivers, the cost to ship a standard 40′ container has quadrupled since Q1, millions of workers have not reentered the work force and businesses have not yet discovered the equilibrium wage that will entice them to return. Look at what Amazon and Walmart are now having to pay just to keep the workforce steady. What we commonly call supply chains are, in fact, value chains. Each level is populated by suppliers who wish to profit from their part in a process. All have to produce an output or service, cover costs, deliver, and get paid enough to profit. Just to put a box of cereal on a grocery shelf requires farmers to produce grains, sugar, fruity bits, etc, deliver these bits to processors who render them usable for Kellogg, say. The processors then have to do their part and once again, deliver their inputs to Kellogg, at a profit. Kellogg gets the stuff to make the cereal, having already gotten the very expensive equipment required to put everything together for dozens of different products and get those products in packages, bought from those suppliers and the truckers that bring that stuff into the plant. Once the cereal is made and packaged it must be distributed, requiring more trucks, warehouses, and finally more trucks to get everything to the retailer. All these folks need to charge a price for their work that includes a profit. And this is just to make a box of Raisin Bran. Think of how this all has to work to make a car with 10,000 parts. Mess up any part of this chain, experience shortages in anything and force someone to wait is what Elon Musk once called “production hell.” Corporate strategies over the last two decades have unwittingly, perhaps, put our economy on a knife edge and the suffering is not going to end soon.
Right you are. For years I thought long supply chains combined with just in time delivery was not a resilient method. You can have one maybe but not both. The functional equivalent of picking up nickels in front of a steam roller. We just got flattened!
If American citizens can’t/won’t fill the current pool of job openings, let’s allow immigration in order to fill these openings. We can even give them a legal pathway to citizenship!
@emptynester. If wages aren’t high enough to attract workers, then wages are not high enough. Bringing in millions of new workers and having them sleep under bridges, that is not a solution.