US Economy Started Q4 On Thin Ice, PMIs Suggest

If bad news is good news, there was good news Monday. Or something.

US business activity contracted for a fourth month in early October, according to preliminary readings on S&P Global’s PMIs.

At 47.3, the headline print on the composite output index was the second-worst since 2009 if you don’t count the collapse seen around the original pandemic lockdowns.

Notably, both the services and manufacturing PMIs printed in contraction territory simultaneously for the first time since June of 2020 (figure below).

That suggests the world’s largest economy began the fourth quarter on a decidedly downbeat note. The first official read on Q3 GDP is due later this week, and is expected to show a reasonably strong expansion following consecutive quarterly contractions.

Although S&P Global said a renewed contraction in new orders was only modest in early October, it was nevertheless broad based. Both services and manufacturing firms saw weaker demand. Input cost inflation “picked up at the start of the fourth quarter,” the color accompanying the release said.

Confidence is waning. In fact, firms are feeling worse about the outlook than virtually any other point in the history of the survey, S&P Global noted. Firms expressed consternation around America’s cost of living emergency (I won’t call it a “crisis” out of respect for locales where the situation is materially worse), a decelerating economy, falling consumer demand and, of course, rate hikes.

On that latter worry, the worse the incoming data, the better for markets to the extent it argues for a less aggressive Fed. Officials are in their pre-meeting quiet period, but the narrative moved back in a relatively dovish direction late last week when a Wall Street Journal article and remarks from Mary Daly revived the “Fed pivot” trade.

Commenting Monday, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, painted a somewhat grim picture, even as he elaborated on the silver lining. “The surveys present a picture of the economy at increased risk of contracting in the fourth quarter at the same time that inflationary pressures remain stubbornly high,” he said. “However, there are clearly signs that weakening demand is helping to moderate the overall rate of inflation, which should continue to fall in the coming months, especially if interest rates continue to rise.”

Bad news is good news.