Preliminary PMI data for the US released on Friday offered few surprises, which was just as well. This week saw enough fireworks without the activity data adding to the bond melee.
The flash print on the S&P Global composite gauge for September was 50.1, a tick lower from August and just barely in expansion territory. It was the lowest reading since February. A measure of backlogs fell to 44.7, the lowest since May of 2020 and the new orders gauge retreated to the lowest levels of the year.
The services PMI, at 50.2, barely held above the demarcation line. “US businesses signaled a broad stagnation in output” at the end of Q3, the color accompanying the release said. Demand conditions were described as “muted” as the service economy “lost further momentum.”
In the context of an economy that’s stubbornly resilient — resilient to a fault, if you will — this was actually good news, particularly given the escalating bond selloff which equities are increasingly disinclined to countenance.
On the manufacturing side, 48.9 was a slight beat to consensus but still indicative of contraction.
As usual, these prints have market-moving potential only in their “flash” form. If the ISM surveys paint a different picture when they’re released at the first of next month, the signal from the S&P Global surveys is largely irrelevant in the eyes of traders. That’s not a criticism. It’s just the way it is: ISM is treated as top-tier data. The alternative gauges don’t enjoy the same billing in the US as they do overseas.
As the simple figure above shows, the US is converging on stagnation. Better readings on the manufacturing side obviously won’t offset deceleration in services given the composition of the US economy. But a slowdown is (arguably) desirable at this stage.
The employment picture suggested robust hiring, but the anecdotal account on offer in the release was encouraging to the extent it pointed to less in the way of wage-spiral risk. There were “reports that staff retention was improving” and companies “also noted that vacancies were filled with greater ease than had been seen in recent months.” Firms demonstrated “a greater ability to find suitable candidates for roles.”
Commenting on Friday, S&P Global economist Sian Jones said that “inflationary pressures remained marked, as costs rose at a faster pace again” due in part to “higher fuel costs following recent increases in oil prices, alongside greater wage bills” which served to push up operating expenses. Still, Jones went on, “weak demand placed a barrier to firms’ ability to pass on greater costs to clients, with prices charged inflation unchanged on the month.”
Bottom line: The flash PMIs for this month suggested the US economy is cooling, the labor market is rebalancing and firms’ pricing power is waning. Whether bonds are inclined to listen is another question entirely.
