U.S. Flash PMI

Solid output growth belies widening sector health divergences, selling prices rise at slower rate

The headline S&P Global Flash US PMI Composite Output Index edged down from 54.3 in July to a four-month low of 54.1 in August. Output has now risen continually over the past 19 months. Although the pace of expansion slowed slightly in August, it remained among the highest seen over the past two years.

However, growth has become increasingly uneven. While service sector activity grew at a solid and increased rate in August, the rate of growth falling just shy of June’s 26-month high, manufacturing output fell for the first time since January. The factory output decline was the steepest recorded since June 2023.

Sector variances also widened in terms of order books. Inflows of new work rose at a slightly increased rate in August, driven by stronger demand for services. Inflows of new business in the service sector showed the second-largest rise recorded over the past 14 months. In contrast, inflows of new orders into factories fell for a second successive month, dropping at the sharpest rate since December.

Both sectors nevertheless recorded falling volumes of new export orders. Although the drop in services exports was only very modest, the decline in manufacturing was the largest for 12 months.

Optimism about output in the year ahead lifted from July’s three-month low, but remained below the survey’s long-run average. An improvement in service sector confidence was offset by a gloomier mood in manufacturing. Where sentiment was buoyed, companies cited brighter prospects on the back of investments in new products and marketing, as well as improved business forecasts aligned with hopes for lower interest rates and lower inflation. However, optimism was checked by uncertainty regarding the Presidential Election and concerns about future demand, especially in the manufacturing sector.

Employment fell in August, dropping for the first time in three months. Net job losses have now been reported in three of the past five months, marking the softest spell of payroll growth since the first half of 2020. A renewed fall in service sector jobs after two months of job gains was accompanied by a near-stalling of employment growth in the manufacturing sector, which posted the smallest payroll gain since January. While falling employment in the service sector largely reflected difficulties hiring staff and replacing leavers, the cooling job market in manufacturing was driven by growing concerns about the business outlook.

Average prices charged for goods and services rose at the slowest rate since June 2020 barring only the recent dip seen in January. The rate of inflation is now only marginally above the average recorded in the decade prior to the pandemic.

Although selling price inflation ticked higher in manufacturing, July’s reading had been the lowest for a year and the latest reading was only modestly above the pre-pandemic average. Selling price inflation meanwhile cooled in the service sector to the second-lowest since May 2020 to a level only marginally above the pre-pandemic average.

The slower rise in charges occurred despite sustained upward pressure on input prices. Average costs across manufacturing and services rose at an unchanged rate in August, matching July’s four-month high.

Input price inflation consequently remained elevated by historical standards, most notably in the service sector. Although the latter cooled slightly from July’s four-month high, the rate of input cost inflation accelerated in manufacturing to the highest since May.
Firms cited higher staff costs as a key cause of raised prices alongside higher raw material prices and increased shipping rates.

The S&P Global Flash US Manufacturing PMI fell from 49.6 in July to 48.0 in August, signaling a deterioration in business conditions within the goods-producing sector for a second successive month and the steepest rate of deterioration since December.

All five components of the PMI weakened in August. Increased rates of decline for new orders and inventories were accompanied by the first fall in factory production for seven months. Employment growth meanwhile slowed to near-stagnation. Suppliers’ delivery times also shortened to the greatest extent since February, in a sign of suppliers being less busy amid weaker demand for raw materials: input buying by factories fell at the sharpest rate for eight months. However, inventories of finished goods rose markedly for the third time in the past four months, the recent accumulation on unfinished inventory having been amongst the largest recorded in the history of the survey, often reflecting weaker than expected sales.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The solid growth picture in August points to robust GDP growth in excess of 2% annualized in the third quarter, which should help allay near-term recession fears. Similarly, the fall in selling price inflation to a level close to the pre-pandemic average signals a ‘normalization’ of inflation and adds to the case for lower interest rates.

“This ‘soft-landing’ scenario looks less convincing, however, when you scratch beneath the surface of the headline numbers. Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline. The manufacturing sector’s forward-looking orders-to-inventory ratio has fallen to one of the lowest levels since the global financial crisis.

“At the same time, service sector growth is constrained by hiring difficulties, which continue to push up pay rates and means overall input cost inflation remains elevated by historical standards.

“The policy picture is therefore complicated, and hence it’s easy to see why policymakers are taking a cautious approach to cutting interest rates. However, on balance the key takeaways from the survey are that inflation is continuing to slowly return to normal levels and that the economy is at risk of slowing amid imbalances.”

In brief:

• The U.S. manufacturing sector is in a funk (new orders fell again and at a steep rate). The same for the Eurozone (largest reduction in new orders since the end of 2023) and for Japan (subdued demand conditions). This is exacerbated by a large inventory overhang which augurs badly for production and demand for commodities in the next 3-6 months.
• Net job losses have now been reported in three of the past five months, marking the softest spell of payroll growth since the first half of 2020
• Demand for services remains solid but employment declined because of “difficulties hiring staff and replacing leavers”. No supply!
• Inflation looks back to pre-pandemic levels.

Strong U.S. retail sales (demand for goods) are only benefitting Asian exporters. Services are keeping the economy humming but slower payroll growth (jobs, hours, wages) will eventually hit overall spending

The other risk is that unemployment keeps rising to a point where consumers and business people begin to protect themselves against a potential recession: spending less, even on services, cost cutting, etc.

Rising productivity is good for profit margins but inflation back in the 2% range will also slow revenue growth.

This looks like a good time to start easing with positive forward guidance.

Three key charts from Goldman Sachs:

  

China Vows to Quicken Buying Unsold Homes for Public Housing

China’s housing regulator pledged to swiftly implement a program to purchase unsold apartments and turn them into affordable housing, its latest effort to cushion a record property slump.

The government will also push forward renting and selling public housing units as soon as possible when conditions are right, Vice Minister of Housing and Urban-Rural Development Dong Jianguo said in a briefing in Beijing on Friday. The ministry didn’t unveil a volume target.

Chinese authorities are trying to introduce a new housing model and put a floor under the prolonged property crisis. The real estate slowdown, now into its fourth year, has dragged down everything from the job market to consumption and household wealth. (…)

The country has formed a top-down plan to win the “uphill battle” of ensuring home delivery, the vice minister said. Since mid-May, the housing authority teamed up with the banking regulator and the National Administration of Financial Regulation to conduct comprehensive reviews on 3.96 million residences scheduled to be delivered this year, he added.

People “have paid money, so they should get their homes,” Dong said. (…)

Bloomberg Intelligence estimates that at least 48 million homes in China have been sold before construction is completed, bigger than Germany’s total housing stock in 2021.

FLASH PMIs

Eurozone business activity rises at faster pace, but new orders continue to fall

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index rose to 51.2 in August from 50.2 in July, thereby signalling a faster pace of output growth in the region’s private sector following two successive months in which the pace of expansion had slowed. The latest increase in activity was the fastest since May, but still modest nonetheless. Output has now risen in each of the past six months.

As has been the case throughout the current growth sequence, the overall expansion in eurozone business activity was centred on the service sector. Services activity increased solidly and at the fastest pace in four months, in large part due to the strongest expansion in France since May 2022 and a further solid rise across the euro area outside the big-2 economies. Meanwhile, services activity in Germany increased modestly.

Manufacturing across the eurozone remained in contraction, however, seeing production decline for the seventeenth month in a row, and at a marked pace that was broadly in line with that registered in July.

While growth of business activity picked up in August, the demand picture was less positive. New orders decreased for the third month in a row, with the pace of reduction only slightly softer than in July. A modest increase in services new business was outweighed by the largest reduction in manufacturing new orders since the end of last year.

The overall reduction in new business continued to be led by falling new export orders (including intra-eurozone trade). New business from abroad was down solidly, and at the fastest pace since February.

August data pointed to a fractional reduction in employment in the eurozone’s private sector, thereby ending a seven-month sequence of expansion. The second consecutive month of broad stagnation in staffing levels was recorded amid a modest increase in services employment and a solid fall in manufacturing workforce numbers. Staffing levels were down in Germany and France, but rose elsewhere.

The fall in new orders meant that companies were still able to keep on top of workloads despite not adding to their staffing levels during August, and were able to work through outstanding business over the course of the month. In fact, the latest fall in backlogs of work was solid and the most pronounced since February.

Eurozone manufacturers responded to demand weakness by scaling back their purchasing of inputs again in August. Buying activity decreased rapidly, and to the largest extent in four months. In turn, stocks of purchases also fell markedly. Firms also looked to reduce their stocks of finished goods, albeit to the least marked extent since April. Suppliers’ delivery times shortened for the seventh consecutive month in August amid reduced demand for inputs. The latest improvement in vendor performance was modest, but more pronounced than in July.

As well as being a function of current demand weakness, reductions in employment, purchasing and inventories also coincided with waning confidence regarding the future outlook for output. Sentiment dropped to the lowest in 2024 so far and was below the series average. Reduced optimism was widespread, with confidence lower across Germany, France and the rest of the eurozone, as well as in both monitored sectors.

Although input costs continued to increase markedly midway through the third quarter, the pace of inflation eased to an eight-month low. Services input prices rose at the softest pace since April 2021, while manufacturing cost inflation was unchanged from the 18-month high seen in July.

In contrast to the picture for input costs, the pace of output price inflation quickened in August. Selling prices increased at the fastest pace in four months, and at a stronger pace than the series average. Services charges rose at the sharpest pace in three months, while manufacturing output prices increased for the first time since April 2023.

• Eurozone Wages Slow Sharply, Paving Way for ECB Rate Cut Wages in the eurozone rose at a significantly slower pace during the three months through June, paving the way for further cuts in borrowing costs by the European Central Bank.

The ECB on Thursday said wages set through negotiations between employers and labor unions or similar bodies were 3.55% higher than a year earlier, a slowdown from the 4.74% increase recorded in the first three months of the year. That was a slower increase than economists expected to see. (…)

A slowdown in wage growth would suggest that services prices are also set to cool, opening the way for a second rate cut when policy makers next meet on Sept. 12. (…)

Japan: Business activity rises at fastest pace since May 2023

August flash PMI data signalled that the solid expansion of business activity at Japanese private sector firms was sustained midway through the third quarter of 2024. Growth was supported by an acceleration of services activity expansion, while manufacturing output returned to growth after declining briefly in July. That said, demand trends diverged as a solid rise in services new business contrasted with subdued demand conditions in the goods producing sector which will be worth monitoring.

Overall optimism levels remained above average to indicate that firms were confident that output will continue to rise in the months ahead. The level of business confidence eased to a 19-month low, however. Anecdotal evidence pointed to concerns over labour constraints, particularly in the service sector where employment growth slowed, and also rising price pressures.

Indeed, overall selling price inflation fell to its lowest since November 2023 despite average input costs rising at the fastest pace in 16 months. Signs of margin pressures were present not only among manufacturers but also in the service sector where new orders growth remained solid, thereby highlighting that private sector firms are partially absorbing price increases in order to remain competitive and to support sales.

The U.S. flash PMI is out later this morning.

CONSUMER WATCH

Discount-Hungry Shoppers Propel Sales Gains for Target, T.J. Maxx Retailers say shoppers are resilient and hunting for deals.

(…) “I think we see an incredibly resilient consumer in the face of high inflation and some of the other challenges they have been facing to manage their household budget,” Target Chief Executive Brian Cornell said on a call with reporters. Shoppers remain focused on value, he said.

Target’s comparable sales, those from stores and digital channels operating for at least 12 months, rose 2% in the three months ended Aug. 3 from the same period a year earlier. (…)

Target lowered prices in the latest quarter compared with the same period last year, executives said. That helped propel a 3% rise in shopper visits during the quarter, they said. The average dollar amount those people spent per trip fell slightly in the quarter. (…)

Last week Walmart, the country’s largest retailer by revenue, said that its most recent quarterly U.S. comparable sales excluding fuel rose 4.2% from a year earlier. Walmart last week reported a slight uptick in its general-merchandise category—discretionary items such as electronics and home goods—which had been in decline for 11 quarters. (…)

Two percent comp growth may sound low, until one realizes that retail inflation was negative for over 12 months. TGT’s +2.0% quarter was in fact close to +2.5% in real terms. WMT’s was even more impressive.

TJX comp store sales were +4%. Management noted that the current quarter is off to a good start. Recall that Walmart’s CEO earlier said that “things have been remarkably consistent” and that “we aren’t experiencing a weaker consumer overall.”

A good back-to-school season generally augurs well for holiday sales.

Speaking of inflation:

Business Inflation Expectations Decreased to 2.2 Percent

Minutes Show Fed Officials Gearing Up for September Rate Cut

Minutes released Wednesday showed that “several” of the 19 Fed officials saw “a plausible case” for cutting rates by 0.25 percentage point at the July 30-31 meeting or indicated “that they could have supported such a decision.” (…) “The vast majority” of officials agreed that “it would likely be appropriate to ease policy at their next meeting,” in September, if inflation data continued to come in about as expected. (…)

US job growth in year through March was far lower than estimated

First, what is the QCEW?

The publication of nonfarm payrolls as estimated by the establishment survey is certainly one of the most closely followed economic news items each month, as it gives an idea of the vitality of the job market. It is, however, a rather imprecise report, since it is based on responses to a survey with a fairly small sample size of around 120,000 companies and fails to reflect net business creation in a timely manner.

To compensate for these methodological weaknesses, once a year, the Bureau of Labor Statistics benchmarks the level of nonfarm payrolls to a much more comprehensive employment series called the Quarterly Census of Employment and Wages (QCEW). The latter derives its job estimate not from a survey, but from tax records and cover roughly 95% of businesses in the United States. (…)

In part, this reflects the backward looking nature of the birth/death model used in the establishment survey to estimate net business creation. Historically, this model has failed to reflect increases in business bankruptcies and has therefore tended to overestimate job creation at the end of business cycles. Such an overestimation is probably taking place now, as high interest rates weigh increasingly heavily on businesses. (NBF)

The BLS:

The department’s estimate for total payroll employment for the period from April 2023 to March 2024 was lowered by 818,000. The revision represented a total downward change of about 0.5% and means that monthly job gains during the period averaged roughly 174,000, compared to the previously reported figure of 242,000.

The sharply lower number is the first of two “benchmark” annual revisions undertaken by the department as it collects more accurate data only available in the months after it publishes the monthly payrolls report.

If the tally holds through the final revision in February, it would be the largest downward revision since the 902,000 reduction to employment in March 2009.

It also chimes with the view of some economists that data-gathering issues mean the strong job gains previously reported have been systematically overestimated.

Private employment growth was revised down by 819,000, or 0.6% below what had been previously estimated by the department. Government employment was basically unchanged.

The professional and business services category saw the biggest reduction of jobs, shedding 358,000, or 1.6%, from the prior estimate, followed by leisure and hospitality at 150,000 jobs, down 0.9%. The hard-pressed manufacturing sector saw a reduction of 115,000 jobs, also down 0.9%.

The few sectors that saw upward revisions included private education and health services, up 87,000, or 0.3%; transportation and warehousing, up 56,400, or 0.9%; and utilities, up 1,700, or 0.3%.

The revisions suggest government and private employers had about 157.3 million workers on their books in March on a seasonally adjusted basis, down from about 158.1 million as previously reported.

Labor Department data will continue to reflect the original estimates until the final benchmark revision is published in February 2025. Final revisions are typically not far off the preliminary ones.

“This is a noticeably larger than a normal revision … it wouldn’t be a stretch for the Fed to assume that recent job growth is also being overstated, strengthening its decision to shift attention from inflation toward the labor market,” said Ryan Sweet, chief U.S. economist at Oxford Economics. (…)

So, by March 2024, national employment increased 1.3% as measured by the Quarterly Census of Employment and Wages (QCEW) program. The original BLS data showed employment up 1.9% YoY last March. That declined to +1.6% in July.

Applied to Aggregate Weekly Payrolls, the reduction in job numbers would trim payrolls growth down from +5.9% to +5.3% in March 2024. Payrolls growth was +4.8% in July.

Meanwhile, today’s downward revision in payroll employment didn’t elicit a market reaction. The annual revision for the 12 months through March 2024 implies average monthly payroll growth was roughly 173,500 rather than 241,600. That’s roughly the same as during 2018 and 2019, before the pandemic. Today’s revision implies that productivity growth will probably be revised higher from 2.9% to 3.4% y/y through Q1-2024. We are still expecting to see stronger August economic indicators, confirming that the labor market and the economy have normalized and are in good shape. That’s all fine with us. (Ed Yardeni)

Goldman Sachs:

(…) we think that today’s downward revision to payroll growth exaggerates the degree to which job growth has been overstated by about 500k, both because the QCEW likely excludes many unauthorized immigrants who are not in the unemployment insurance system but were correctly picked up in payrolls initially, and because the QCEW itself has tended to be revised up in recent years. As a result, we think the true downward revision should be about 300k or 25k per month, which would imply that monthly job growth over this period was closer to 215-220k than the initially reported 242k, but not as low as the 174k pace implied by the revisions.

Bank of Korea Holds Rate Steady, Signals Pivot to Easing Soon The bank now expects GDP to grow 2.4% and inflation to average 2.5% for 2024.

Canada Railways Lock Out Workers as Talks Fail, Snarling Trade Moody’s Corp estimated C$341 million per day impact to Canada

Chinese Imports of Chip Gear Hit Record $26 Billion This Year China has been stockpiling ASML systems and foreign machinery

Chinese firms imported almost $26 billion worth of chipmaking machinery, according to fresh trade data released by China’s General Administration of Customs this week. That surpassed the previous high mark in 2021 and comes as American, Japanese and Dutch officials work on increasing restrictions on Chinese companies. (…)

During the period, Chinese companies bought more lower-end equipment after the US and its allies tightened controls on their access to the most cutting-edge technology. That spending spree has helped drive Dutch exports to China to new highs, exceeding $2 billion in July for only the second time on record.

Dutch company ASML’s sales to China surged 21% in the second quarter to hit almost half of its total revenue, with sales consisting of unrestricted older systems as Beijing pushes to make more mature types of semiconductors. ASML is the sole supplier of the most advanced lithography equipment required to make cutting-edge chips. China’s Semiconductor Manufacturing International Corp. relied on ASML’s older generation of lithography machines to achieve a technological breakthrough last year, Bloomberg News has reported.

Chinese chipmakers are expected to grow their output by 14% to 10.1 million wafers per month in 2025, or nearly a third of the global industry’s production, after achieving a 15% increase this year, trade group SEMI estimated in June. (…)

LIQUIDITY WATCH

Quantitative Tightening Goes Global for the First Time, in Test for Markets Central banks have moved to slim their balance sheets

After having sailed through uncharted waters repeatedly over the past two decades, the developed world’s top central banks are entering a new stretch: For the first time, they’re engaging in joint quantitative tightening.

Last month’s decision by the Bank of Japan to steadily shrink its portfolio of bond holdings in coming years means it’s now engaging in balance-sheet contraction alongside the Federal Reserve, European Central Bank and Bank of England. While QT, as it’s known, is different in each jurisdiction, it involves a withdrawal of the liquidity that central bankers pumped into their economies during the pandemic crisis by buying bonds.

When the Fed conducted QT for the first time, policymakers were blindsided by unanticipated disruptions to money markets in 2019. While Chair Jerome Powell has said the Fed learned lessons from that, and pledged a halt before trouble emerges, there’s no guarantee for smooth sailing — particularly now that investors are facing a global drain on cash.

Many on Wall Street anticipate the Fed’s QT program only has months to go, as the US central bank shifts to cutting interest rates to help support the economy. The Fed already in June eased the pace at which it’s shrinking its bond portfolio. (…)

“Bond purchases by central banks in earlier years plied economies with cash, and part of that was used to invest in riskier assets such as equities,” Barrow wrote. “But now these central bank asset piles are being reduced and that presents a challenge for investors.” (…)

Shirai, a professor of economics at Keio University in Tokyo, also noted that many central banks are now lowering interest rates. That should help limit any downward pressure on bond prices from QT, she said. (…)

While bank reserves parked at the Fed appear sizeable at around $3.3 trillion, some market participants have highlighted the risk of worrisome cracks appearing, similar to those seen five years ago — arguing for a near-term end to QT. Meantime, if acute funding pressures did suddenly emerge, the Fed today has liquidity backstops that it didn’t have back in 2019 to address such a scenario. (…)

Like the Fed, the Bank of Canada has been shrinking its balance sheet for more than two years now. This year, the program has had the effect of impairing the functioning of short-term funding markets, forcing the BOC into periodic interventions. Nevertheless, Deputy Governor Carolyn Rogers said last month indicated the bank would keep going with QT for now because the balance sheet wasn’t yet “normalized.”

Even more determined on normalization is the BOE, which has taken the most aggressive approach — actively selling off bonds from its portfolio, not just reinvesting fewer maturing securities. To address any market liquidity issues, it’s encouraging banks to use a range of lending facilities to get cash from the BOE as needed — known as a demand-driven system. (…)

Japan is a newcomer to QT. Last month, the BOJ announced a program to scale down its purchases, with the expectation that holdings will shrink by 7% to 8% over a little less than two years — taking the amount of maturing bonds into account. Citigroup Inc. estimates a ¥10 trillion ($69 billion) drop by the end of March 2025. The BOJ pledged to be flexible as it proceeds, and to review the program next June. (…)

“Most if not all of the governments are in acute need of public financing and debt issuance,” said Stephen Jen, chief executive of Eurizon SLJ Capital. “How could the central banks fully prosecute their QT plans against this headwind of large debt issuances?”

Full prosecution would be all the harder if markets are unsettled. The big moves in the yen and global equities at the start of this month “should be a wake-up call — volatility is back,” said Jerome Jean Haegeli, a former official at the Swiss National Bank and International Monetary Fund.

“Global QT, should it continue well into 2025, is more likely than not to continue to trigger volatility spikes,” said Haegeli, chief economist at the Swiss Re Institute in Zurich.

FYI: Capital spending by the largest tech firms:

Source: @WSJ

U.S. Election Monitor

• From FiveThirtyEight

Data: FiveThirtyEight. Chart: Axios Visuals

• Goldman Sachs

Vice President Harris leads former President Trump by around 1.5pp in national polling averages and is very narrowly ahead in the swing state that would provide the winning electoral vote (currently this appears to be Pennsylvania). Prediction markets imply 52-54% odds that Harris wins in November.

Since August 1, the odds of a Republican White House victory (-10pp) and sweep (-4pp) have continued to decline, while the odds of Democratic divided government—a Harris victory and Republican control of one or both houses of Congress—have risen the most (+11pp), and that is now the most likely implied scenario, but the outcome is very uncertain.

Tim Walz’s approval stands 6pp ahead of JD Vance’s.

The Senate playing field favors Republicans, but Democrats are still polling ahead in most of the seats they currently hold. Prediction markets imply a 29% chance of a Democratic majority (up 1pp in August).

Control of the House still appears narrowly divided, and most indications continue to suggest it will remain close next year. Democrats have a small lead in national generic ballot polling and prediction markets imply 63% odds of a Democratic majority (up 8pp in August), but seat-by-seat ratings from several widely followed sources tilt slightly Republican and suggest the majority in 2025 could come down to a few seats.