“The Fed cannot totally shift its focus away from its inflation target,” S&P Global’s Chris Williamson warned on Monday.
The context: Six-month-high rates of selling price inflation for both services and manufactured goods across the world’s largest economy, according to subindexes released alongside preliminary PMI data for September.
As expected, the updates told a tale of two economies. The US services sector kept expanding this month, while manufacturing contracted. Again.
At 55.4, the services index printed marginally ahead of estimates, but the factory gauge missed badly: 47 was down meaningfully from August’s final reading and represented a 15-month low.
“The early survey indicators for September point to an economy that continues to grow at a solid pace, albeit with a weakened manufacturing sector,” Williamson went on.
Frankly, the color accompanying Monday’s release wasn’t encouraging. Although a reasonably buoyant services sector is still powering 2% or better growth, Williamson cited several “warning lights,” including the unbalanced nature of the expansion and election-related uncertainty which appeared to impact confidence.
He described sentiment, demand, hiring and investment as “subdued” before blaming political ambiguity for “casting a shadow” over the 2025 outlook and limiting near-term hiring. Firms were reluctant to add workers in early September, pushing a gauge of employment lower for a second month.
Notably, “optimism” — “sentiment” or whatever you want to call it — was worse on the services side, where a forward-looking output gauge sank to the worst levels since October 2022, when US equities troughed for the cycle. Sentiment was better among factories in true “darkest before the dawn” fashion, even as the decline in new orders was the most acute since December 2022.
Williamson’s commentary on inflation was outright grim, even if he probably wouldn’t use those words. Jerome Powell, he said, “may need to move cautiously in implementing further rate cuts.” Output prices are rising faster than at any point since Q1, when a succession of warm CPI releases delayed the onset of rate cuts.
Services firms, Williamson wrote, saw their input costs rise “at the fastest rate for a year,” presumably on lingering wage pressure.
And here I thought the workers were pacified.
Well, that’s probably the most interesting commentary of the day. I’ve always had issues with calling PMI releases “data” when they are actually surveys. Useful but not hard data, in this old guy’s mind.
That said, those observations may be superior to the output from the econometric models the Fed relies upon. All is not lost! It’s clear that finding what the neutral interest rate is will soon be revealed if we could just parse even more data sets at higher speeds, AI to the rescue!
What a waste of time and energy this all is.
“What a waste of time and energy this all is.” – this an apt description of my current view of my job and politics. I feel like I’m caught between living in two Mike Judge movies: Office Space and Idiocracy. I may need to take a seat next to Beavis and Butthead on a bus across America to get away from it all if the situation persists.
dayjob – I always applaud a B&B reference!
I wonder how accurate a diffusion index survey is at measuring rate of change. If survey questions are “is X up, down, or unchanged”, how do you conclude X is +3.4% yoy?