Surprise! The US services sector is still running hot.
If I didn’t know any better, I’d be inclined to suggest 500bps worth of rate hikes weren’t “sufficiently” draconian (to employ the Fed’s preferred vernacular) to blunt the consumption impulse among a society of incorrigible spendthrifts armed with 573 million credit card accounts.
The flash read on S&P Global’s gauge of US services sector activity for May was 55.1, up from April, higher than a year ago and a full point ahead of the most optimistic guess from more than a dozen glorified palm readers. It was the fourth straight month of expansion, and the best print in 13 months.
The employment gauge on the services side printed 53.8, the highest since last summer.
On the manufacturing side, it’s a different story. S&P’s gauge of factory activity for the US slipped back into contraction territory in early May. A gauge of input price pressure was the lowest since May of 2020.
In services, cost pressures remained evident, even as the rate at which cost burdens rose moderated. As was the case in the European PMIs released earlier Tuesday, the US release suggested services sector companies are raising prices to consumers in lockstep with higher labor costs.
“[Services] companies often stated that greater wage bills drove inflation, as firms sought to pass-through higher cost burdens to clients,” the accompanying color said.
Fortunately, reality denial is a fixture of modern society, which means we’re free to pretend that what’s happening isn’t actually happening. So we could say, for example, that there’s no wage-price spiral — even when companies tell us they’re raising prices because their wage bills are higher.
To be sure, goods demand has waned, retailers still have too much inventory, input costs for factories are receding and that’s all showing up on the manufacturing side. But it scarcely matters in the US context because the world’s largest economy runs on services, not manufacturing. Just ask anyone whose father lost his livelihood at the factory and died at 80 frothing milk for $12 cappuccinos.
“The inflation picture is changing,” Chris Williamson, S&P Global’s Chief Business Economist, said Tuesday. “Whereas manufacturing prices spiked higher during the pandemic due to strong demand and deteriorating supply, it is now the service sector’s turn to be hiking prices amid resurgent demand and an inability to cope with order inflows due to a lack of capacity.”
Nothing further.
Can so much money sloshing around in our economy… can it extend recessionary impacts, not merely give a headache to Fed members?
Is it possible – maybe even likely – that recessionary pressures may be a drag on the economy well into next year?