A gauge of US services sector activity tumbled into contraction territory for July, suggesting the world’s largest economy may be decelerating faster than expected.
The preliminary read on S&P Global’s services PMI for this month was just 47, a woeful miss to consensus and well below the most pessimistic guess. Estimates ranged from 51.5 to 53.1.
It was the worst print since May of 2020 in the immediate aftermath of the pandemic collapse (figure below). A subindex of firms’ hiring activities dropped to a five-month low.
Mercifully, the flash read on the manufacturing PMI matched estimates, but at 52.3, it still suggested the most anemic pace of US factory activity in two years.
The composite gauge fell to 47.5 from 52.3 in June, marking the first contraction in private sector US business activity since 2020.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, called the data “worrying.” “Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis,” he said, adding that the preliminary survey data is “indicative of GDP falling at an annualized rate of approximately 1%.”
Although economists and market participants expected factory activity to cool as goods demand waned, the services sector was supposed to take the baton. Unfortunately, inflation short circuited the relay.
This was predictable. The services sector is sensitive to consumer sentiment which, as measured by the University of Michigan, has never been worse (figure above).
“The service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook,” Williamson went on to say.
The figures came just hours after S&P Global’s composite index for the euro area likewise fell into contraction territory (figure below). Germany’s services sector contracted this month, Friday’s data suggested, and the broader regional gauge showed services activity stalled across Europe.
At 49.4, the composite index for the bloc missed every estimate from two-dozen economists. A gauge of new orders tumbled to 46.9.
In Europe, the manufacturing sector is the larger concern. “Producers are reporting that weaker-than-expected sales have led to an unprecedented rise in unsold stock,” Williamson said. Demand, it would seem, is cratering.
The demand picture is scarcely better in the US. S&P flagged deteriorating order books and a “sharp” drop in work backlogs, indicative of “excess operating capacity” in the face of slower demand growth. The read-through: Both manufacturing and services firms will likely need to curtail output absent a revival in demand.
The silver lining, both in the US and across the pond, is that inflationary pressures abated. But not fast enough to offset the pain associated with a rapid deceleration in economic activity. That’s stagflation.
“The eurozone economy looks set to contract in the third quarter,” Williamson went on to say, noting that outside of the pandemic, July’s contraction “is the first signaled by the PMI since June 2013.”
That doesn’t bode well for the sustainability of the ECB’s rate hiking cycle, which began — checks watch — yesterday.
It occurs to me in a logical sense that the multiple causes of inflation make stagflation inevitable. If the Fed succeeds in tamping down demand, its inability ta affect supply correspondingly, leaves the cost problems in the supply chain a largely unaffected driver of continued price increases, if not at the current rate, at least above the target.