The US economy is downshifting in real time.
On the heels of similarly underwhelming anecdotal data out of Europe, flash PMIs for the US came in woefully short of estimates on Thursday, magnifying recession concerns, while perhaps allaying some fears of over-tightening from the Fed.
The preliminary read on S&P Global’s manufacturing PMI for the US tumbled to 52.4, down dramatically from May. It was the worst print since July of 2020 (figure below).
The new orders gauge dropped precipitously, to a contractionary 48.4 from 56.1 last month. Notably, the input prices index fell to the lowest in more than a year, perhaps presaging the first signs of price moderation — or demand destruction.
Services activity likewise decelerated. At 51.6, the headline print missed the lowest estimate from a dozen economists. Note that the gauge was perched at 64.6 this time last year.
The color accompanying the surveys described “a remarkable drop in demand for goods and services during June compared to prior months.” Services firms indicated the “mini-boom” from the relaxation of pandemic restrictions was in jeopardy from the rising cost of living as inflation soared. Goods producers, meanwhile, saw orders for non-essentials dry up.
I’ve warned about that repeatedly. The goods-to-services “switching” narrative made sense until inflation started to broaden out. Economists habitually speculated that a transition to services spending could help bring overall inflation down given the concentration of price pressures in goods. It was a nice story, but it didn’t anticipate inflation spilling over into services, a fatal flaw which, in hindsight anyway, seems inexcusable — it suggests economists didn’t connect the dots between a shift in demand and the upward pressure on prices that demand shift might engender.
The Biden administration may be about to make a conceptually similar mistake while trying to wrestle down gas prices. I should note that I’m generally in favor of measures aimed at keeping necessities affordable, even when such measures are counterproductive. I don’t think citizens in advanced economies are willing to countenance much in the way of sacrifice, which means the odds of societal upheaval from high inflation are elevated. Still, I’d be totally remiss not to acknowledge that artificially suppressing the cost of driving during peak summer driving season will only serve to boost demand for gas, thereby contributing to higher prices. Indeed, it’s likely that efforts to forcibly reduce prices at the pump could end up pushing them higher over the medium-term.
In any case, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said Thursday that US businesses “have become much more concerned about the outlook as a result of the rising cost of living and drop in demand, as well as the increasingly aggressive interest rate path outlined by the Fed and the concomitant deterioration in broader financial conditions.”
If consumer sentiment is any indication, business activity has some catching down to do (figure below).
Consumer sentiment is just a proxy of future demand. And consumer sentiment fell to a record low earlier this month.
The good news is, waning demand is beginning to bleed prices, albeit only slowly. Obviously, PMI price gauges are still elevated, but the rate of input price inflation in the services sector was the softest in five months on S&P’s survey, even as it would still count as a record for any month prior to April of 2021. The rate of increase in output charges was the slowest in 15 months.
Both manufacturers and service providers added jobs at a slower pace this month, the PMI employment indexes indicated. Separate data out Thursday showed initial jobless claims fell slightly last week, but the prior week was revised higher, pushing the four-week moving average to 223,500, the highest since January 29.
Williamson spelled out the implications of the PMI readings. “Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession,” he said.
High energy prices are a major contributor to the current inflation and to recession risk. The normal market response would be for oil and gas companies to take the extra cash from high prices and invest it into producing more oil and gas. Except Western governments are now working to prevent that response. They are refusing permits for exploration and for transportation infrastructure (pipelines) and imposing “windfall” taxes. In short, they are punishing attempts at investment to fix the problem and then blaming producers for not doing what governments are telling them not to do.
Even with demand destruction, let’s call it what it really is: impoverishment of the citizenry, I think we are going to be stuck with high energy prices for many years. We lack capacity to increase supply and governments are working to keep it that way.
I have no idea how we get out of this mess. Governments have stuck their fingers in their ears and renewable energy is far more resource intensive to bring online. solar power needs 20x as much material as nuclear for example, to construct the same power generation capacity. Renewables are going to take ages because we have to mine a LOT of stuff out of the earth to produce them.
In Europe, gas shortage is not accelerating renewable energy, it is instead forcing them back to using coal. No energy, no food production. This is existential.
@Free Capital – how do US policies explain the lack of production hikes in other nations?
In the SA, after the junk and sub-prime debacle lenders lenders to and investors in shale oil producers demanded that the companies focus solely on dividends and buy-backs. No capex, please!
In my region, especially in KS and MO, there is a lot of NIMBY politics. Alternate energy development is being hampered by any means possible — wind turbines make cows deaf, new wires cause cancer — whatever. And still, we are exporting energy, while considering a gas tax holiday. Since new roads come out of our pockets anyway, this is just a backdoor subsidy to oil cos.. First we sell our SPR, with no effect except it’s gone. Now we are shipping our non-renewable energy resources offshore. Where are the adults when we need them?
@Free Capital – lead time to bring new production/refining online is three to five years at least. Energy companies are not going to “take the extra cash” and invest it in the way you think.