Economic activity in the US picked up markedly in early February, preliminary PMIs for this month suggested.
In what may be viewed as evidence that January’s hot data wasn’t merely a reflection of good weather and seasonal adjustment quirks, S&P Global’s activity gauges came in ahead of consensus and markedly so for the services sector.
The flash read on the services index was 50.5, back in expansion territory and easily ahead of the 47.3 consensus expected.
On the manufacturing side, a 47.8 print was marginally better than forecasts. The composite index, at 50.2, was up sharply from 46.8 in January, and marked an eight-month high.
Although input cost inflation was the second-weakest in more than two years, it was still high from a historical perspective. “Anecdotal evidence” suggested wage pressures were the “main driver behind higher cost burdens.”
That’s not music to the Fed’s ears — it underscores the risk of hot wages keeping inflation elevated in services, where policymakers are focusing almost all of their attention in 2023.
According to the survey, firms are still looking to pass along higher labor costs to consumers. A measure of selling price pressures in services rose at the briskest rate in four months.
This is the familiar good news/bad news dichotomy. Plainly, it’s nice that activity in the largest part of the world’s largest economy isn’t contracting anymore. On the other hand, the read-through for the Fed is ominous.
“[T]he improved supply situation has taken price pressures out of manufacturing supply chains, but the survey data underscore how the upward driving force on inflation has now shifted to wages amid the tight labor market,” S&P Global’s chief business economist Chris Williamson said Tuesday.
He went on to warn that, “by potentially stoking concerns over a wage-price spiral, accelerating service sector price growth will add to calls for higher interest rates, which could in turn subdue the nascent expansion.”
