Business activity in the US contracted meaningfully in early December, data out Friday suggested.
Flash reads on S&P Global’s PMIs for this month were very poor, both relative to consensus and in absolute terms. The silver lining was more anecdotal evidence of disinflation.
The services gauge printed a woeful 44.4, missing even the most pessimistic projection from the 15 forecasters who ventured a guess. It was the worst read since August and the second-worst since June of 2020 (figure below).
“Higher borrowing costs, housing and financial sector weakness and inflationary pressures all weighed on customer spending,” S&P Global said, of the US services sector, which is experiencing a “steep and sharp downturn.” December marked the sixth straight month in contraction territory for the gauge.
At 46.2, the manufacturing PMI wasn’t much better. December’s flash print counted as a 31-month low. The decline in new orders seen by US manufacturers was among the sharpest since the financial crisis, the color accompanying Friday’s release said, citing a decline in customer spending.
The data came on the heels of a retail sales report which suggested spending on goods receded in November, while separate reports released Thursday showed factory activity slipping.
“The upside is that weaker demand has taken pressure off supply chains which had been stretched during the pandemic,” S&P Global’s Chief Business Economist Chris Williamson said.
An amusing Bloomberg piece published Thursday suggested some retailers are now telling suppliers to “stop sending them products — even if those items are selling well.” That speaks to an inventory overhang more so than waning demand. “I’ve never really seen a time before — or heard of a time — when retailers have been cutting back on what sells just because they don’t have the space,” one purveyor of home goods said. Although the implication was that demand is still solid (apparently, robust drop-shipping volumes suggest the consumer isn’t the issue), many believe consumption is set to abate in the months ahead, particularly for goods.
Of course, the good news in all of this is that it points to slower inflation. According to S&P Global, December saw the “largest monthly cooling of firms’ input cost inflation in the 13-year history of the survey barring only the lockdown-related slump in April 2020.”
Williamson summed it up: “In short, the survey data suggest that Fed rate hikes are having the desired effect on inflation, but that the economic cost is building and recession risks are consequently mounting.”
SP500 is over-exposed to goods, relative to the US economy and CPI index which are dominated by services; evident bearish implications.