The all-important US services sector held up in June, with caveats.
On the heels of a lackluster read on factory activity, some worried this week’s services PMI data would feed a recession narrative that’s gathering adherents by the day. Those fears proved unfounded. Sort of.
ISM services printed 55.3 for June, easily ahead of consensus, albeit the lowest since May of 2020 (figure below).
Separately, the final read on S&P Global’s services gauge for last month was revised noticeably higher versus the flash print.
That’s where the good news stopped. Or at least where the unequivocally good news ended.
S&P Global noted the first decline in new orders in nearly two years, a development attributed to “price pressures and economic uncertainty.” Year-ahead confidence sank to a 21-month low. The new orders gauge in the ISM survey dropped as well, but at 55.6, remained solid.
Disconcertingly, ISM services employment fell into contraction territory. The 47.4 reading was the lowest since July of 2020. Anthony Nieves, who chairs the services survey committee, said “logistical challenges, a restricted labor pool, material shortages, inflation, the pandemic and the war in Ukraine continue to negatively impact the services sector.”
So, if you forget about the broken supply chain, labor scarcity, a dearth of raw materials, generationally high inflation, the plague and an old school war in Europe complete with tank battles and maritime blockades, things are going relatively well.
ISM prices paid fell, but at 80.1, the gauge was still extraordinarily elevated and hardly indicative of any meaningful relief on prices. The S&P Global survey flagged a “further substantial” increase in input prices attributable to rising wages. “Firms often passed on higher costs to their customers, but efforts to stimulate demand led to a further slowdown in charge inflation,” S&P Global said. That’s margin erosion.
The ISM respondent anecdotes were a compendium of familiar grievances. “It seems like everyone is jumping on the bandwagon (of) raising prices under the guise of inflation,” someone in public administration said. A panelist in accommodation and food services suggested supply chain frictions are resolving, but said labor problems “have resurfaced” while costs are up “dramatically.” Someone else mentioned China’s “zero COVID” policy, and a respondent in construction said, tellingly, that “rate increases have slowed sales but have not helped with supply challenges yet.” It’s a broken record: The Fed can bleed demand, but can’t resolve supply factors.
Chris Williamson, S&P Global’s Chief Business Economist, offered an uninspiring summary. The US economy underwent a “broad-based weakening” last month, suggesting GDP growth “stalled” and could fall in the months ahead. The rising cost of living is impeding household demand and although upward pressure on prices has eased, inflation is elevated. All of that, Williamson said, “points to a bout of stagflation in the near-term.”
Thinking back to mid 2020 all the MMT pundits were claiming stagflation wouldnt materialize (ignoring the fact that demand would stay high while production dropped) and all the neolibs were claiming we were giving people too much money (ignoring that people couldnt reasonably go to work in a pandemic).
If the political atmosphere wasn’t such a team sport there might be some interesting lessons for the future there, like focusing only on temporarily expanding SNAP/municipal grants/etc to keep inflation more sectorally constrained… although maybe that’s naive. The left also claimed we couldnt wait for any sort of restrictive program to wind up and should start the money helicopters asap, and the right probably would have let things burn before agreeing to any sort of plan that didn’t involve massive cash influxes for their donor base.
I dunno, man. Everyone is just wrestling the state back and forth for individual benefit. Seems a little like we’re headed towards our own crisis of the third century.
+1
Agreed Job. The crux of it all is that we haven’t played a political team sport since before I was born.
I would add new Cold War to list of current macroeconomic stressors; it’s certainly implied but deserves it’s own category imho…
I went out to dinner with some old friends a few weeks ago. It was the first time I had eaten indoors at a restaurant since the start of Covid. (My wife and I have been very cautious because we regularly interact with elderly parents.) I was stunned to see the restaurant–which is normally bristling with activity–about ½ empty on a Friday evening. Service jobs are down, because demand for services are still down, because Covid is still affecting the way many people interact with the world, at least in part. For example, people still working from home don’t gather at the old watering hole on Friday after work the way they used to.