US Economy Expanding Rapidly, Alternative Facts Suggest

Not all the data was ominous.

Preliminary US PMIs for March suggested the world’s largest economy expanded at the briskest pace in eight months.

That, despite a chorus of warnings about an imminent deceleration and amid abysmal consumer sentiment tied to the hottest inflation in a generation.

The flash read on the S&P Global composite index for March was 58.5, well above the 55.9 consensus expected, and the highest since July. The services gauge was similarly buoyant (figure below), as was the manufacturing index.

“Manufacturers and service providers registered stronger upturns in activity, largely supported by pent-up demand and the easing of COVID restrictions,” the accompanying color said. It seems as though we’ve been reading from the same boilerplate copy for more than a year.

Apparently, supply chain disruptions eased, and employers were able to fill some open positions, which in turn facilitated more production. New orders rose “markedly,” but cost pressures “remained a significant theme.” Firms witnessed more price hikes in raw materials and energy, and said both the conflict in eastern Europe and new lockdowns in China affected supply chains.

Cost increases for services firms stuck near record highs, and companies were keen to pass along those costs to consumers. Backlogs grew and shortages persisted. Job creation in response to surging new orders and record backlog growth was the strongest in nearly a year.

Commenting, chief business economist Chris Williamson suggested the receding Omicron wave offset drag from the war. Services led the charge and although supply bottlenecks were the least acute in 14 months, Williamson described capacity as “stretched.” Notably, the outlook deteriorated, even as firms seem “resilient.”

The overall picture is the same as it’s been for the better part of two years. “With demand running ahead of supply, selling price inflation for goods and services remained elevated,” Williamson said, adding that “a further upward lurch in costs, which were pushed ever higher by rising energy and other commodity prices, means inflation does not yet appear to have peaked.”

If you’re the pessimistic type, it’s possible to suggest good news is no longer a thing. If the economy is (still) running hot, that just means more inflation and more incentive for the Fed to tighten. If the economy is slowing, that’s bad news too because with the Fed now pre-committed, the odds of a policy mistake grow with incremental evidence of waning momentum.

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