US services sector activity expanded at a solid pace while manufacturing contracted early this month, preliminary PMI data released on Thursday suggested.
I always say “suggested” while editorializing around PMI releases. I think that’s appropriate. These surveys don’t tell us anything definitive. Indeed, even the “hardest” of “hard” macro data isn’t definitive. Don’t forget that.
Anyway, the first look at S&P Global’s PMIs for this month found the services gauge printing a very respectable 55.2. This makes three consecutive months during which that print was 55 or better.
By contrast, the manufacturing print was the worst of the year at 48, down from 49.6.
Technically, the composite gauge now sits at a four-month low, but at 54.1, it’s hardly concerning. From a 30,000-foot level, the US economy’s fine. The composite print suggests GDP growth’s running at a 2% pace for Q3 (give or take), consistent with the last update on the Atlanta Fed’s “now” tracker. In short: The US isn’t in a recession currently, and probably won’t succumb in the near future.
That said, Thursday’s early PMIs for August underscored the uneven nature of America’s growth profile. The soft-landing narrative seems “less convincing… when you scratch beneath the surface of the headline numbers,” Chris Williamson, Chief Business Economist at S&P Global, said. “Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline.”
Note Williamson’s allusion to manufacturing as a leading indicator — a canary, so to speak. In the S&P Global subindexes, the orders-to-inventory ratio is now plumbing levels rarely seen since Lehman. And although overall selling price inflation is now “close to the pre-pandemic average,” services sector employers are still grappling with staff shortages, “which continue to push up pay rates [leaving] overall input cost inflation elevated by historical standards,” Williamson went on.
That juxtaposition — upward pressure on pay set against the specter of incrementally slower demand and a normalization of selling prices — points to margin compression, which in turn telegraphs lower profits, or at least slower profit growth.
Ultimately, the US economy’s performing well enough. But as Williamson warned, there are cracks. And you don’t have to burrow too far down to see them.
To state the obvious: Composite PMI readings of 54 aren’t compatible with 50bps rate cuts on any “standard” assessment, but if the Fed’s goal is to manage risk and preempt a recession, the Committee still needs to consider a half-point move out of the gate. Why? Well, two reasons:
- Exactly nobody believes 25bps makes any difference one way or another. A quarter-point move is purely symbolic. The signaling effect’s important, but in and of itself, 25bps is meaningless.
- The Fed seems unable, unwilling or both to adopt a proactive decision calculus. It’s been three decades since the Fed was forward-looking. By now — 13 months on from reaching terminal — they surely realize they’re fighting the last war. But they don’t seem to have the stomach for aggressive, preemptive rate cuts to forestall a downturn. The same way they didn’t have the intestinal fortitude to get out ahead of inflation with aggressive, preemptive hikes — and we all know how that turned out.
What can you say? C’est la vie.
It seems like initial unemployment and ongoing claims should be pretty darn close to precise macro data. After all, for there to be an unemployment filing, you have to submit paperwork to a government agency. Bureaucracies may be inefficient, but record keeping and reporting is what they do. I understand why there would be revisions of course. Some people and places are bound to report late or be behind on paperwork or have a system outage or the mail was delayed but they go by the postmarked date or Bill from records took a two week vacation and now he’s playing catch-up at his own pace and don’t you see I have a lot on my plate get off my back Beverly I’m the only one who knows how to use this system if I weren’t here this whole place would fall apart you need me you know what this was too upsetting I need to take a break I’ll be at Bennigan’s don’t call me.
Any other macro data is bound to be incomplete since the best you can do most of the time is conduct a survey.
I hate to pop your balloon but a significant number of the unemployed do not file claims for benefits. For those in the higher job strata there are several disadvantages to filing. One of those is that you have to look for jobs the agency thinks you should have. There are other reasons as well. So it is likely there are errors in this data as well. My wife spent four years as a key statistician in the labor data network when we were first married. It doesn’t all go as we think … really.
Okay, but I still had a lot of fun writing about Bill in records. Also, how long ago was your wife doing that work? I have to imagine the combination of online filing and automated data processing has changed things quite a bit. Finally, I should have written, “initial filings and continuing claims,” not, “unemployment.” That’s what I was thinking really loudly in my head, it just managed to slip past editorial review.
How likely is a 25 bps cut at Jackson Hole followed up by another 25bps in late Sept. ??
Not sure what you mean. Jackson Hole isn’t a policy meeting. There’s no chance of that.
Agreed, its not a policy meeting but it could be an inter-meeting cut with Powell specifying its not an emergency cut… to avert a credit event…something like that.
Please don’t bet any money on that.
Why in the world would Powell or other FOMC be even thinking about that?
What “credit event”?
I think that rem meant that the Fed would not want to inadvertently signal something was wrong.
Emergency inter-meeting 50 bp cut would panic the market, and any hint of “credit event” doubly so.
Apologies @rem. I didn’t mean to start a pile-on here. I should’ve just said “no chance” and left it at that.
Thanks Derek. That’s exactly what I meant. No apologies needed Mr H 🙂 Our good friend John L, is still racing with the ball toward the end zone despite the refs blowing the whistle, and the play is over. If Mr Powell were to announce an intermeeting cut, we would have seen a tweet or article by their whisperer. Nik Timaros by now.
The mfg PMI has been more -ve than +ve for the last two years.
Conceptually, mfg PMI should be inverse to net goods imports, right? The more goods the US imports, the lower US mfg activity. Balance of trade (goods) has been increasingly negative since 2020.