If you’re looking for evidence that the US economy may slip into recession imminently, it wasn’t on display in preliminary PMI data released on Friday.
Although the manufacturing sector remained in contraction according to S&P Global’s gauge, the US services sector held up in early December. At 51.3, the services index topped every estimate from more than a dozen economists who ventured a guess.
The services print was the highest since July. The accompanying color played right into the hands of Fed critics worried about the read-through for inflation of easier financial conditions. “Looser financial conditions have helped boost demand, business activity and employment in the service sector, and have also helped lift future output expectations higher,” Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said Friday.
Again, that’s a layup for Fed detractors: Financial conditions eased dramatically in the lead-up to the December FOMC meeting, and the dovish takeaways (plural) from this week’s policy proceedings only added to the jubilant mood. Now, we have a survey of services sector activity which seems to confirm the notion that looser conditions are already manifesting in brisker activity for America’s services-driven economy.
The employment index on the services side rose to 52, the best reading since June, while a gauge of new business hit a five-month high.
And yet, Williamson offered a caveat. “The increased cost of living and cautious approach to spending by households and businesses means the overall rate of service sector growth remains far short of that witnessed during the travel and leisure revival back in the spring and summer,” he said, adding that taken as a whole, the preliminary snapshot of the US economy for December suggests a “weak” rate of overall growth.
Further, the selling price index in the S&P Global survey isn’t indicative of another meaningful inflation overshoot. Instead, it suggests consumer prices are likely running “only modestly” above 2%, Williamson said, even as input cost inflation for services firms remains “elevated by historical standards.”
Generally speaking, the PMI update was notable for the allusion to financial conditions and not much else. The composite gauge printed 51, up slightly from November. This time last year, the index sat at 45, five points into contraction territory.
Seems like the long and variable lags of Fed policy may not always play nicely with the short and variable lags of our increasingly 0DTE investment horizons.