Note: Travelling week

U.S. SERVICES PMIs

Once again, pick your reading:

The ISM: Services Activity Cooled in November, Prices Did Not

The ISM services index dropped 3.9 points in November; that is the second largest monthly decline since the end of 2022 and puts this gauge of service sector activity at its lowest reading since August. These words describe three out of four components that feed into the headline index: Still growing, just more slowly than last month. That is true for employment which fell just 1.5 points, for business activity which fell 3.5 points, and new orders which fell 3.7 points . All remain in expansion territory above 50. (…)

Source: Institute for Supply Management and Wells Fargo Economics

Services inflation has been difficult to tame in this cycle, and the outlier in terms of wage growth in October was in service-producing industries. Wages and salaries in that sector rose 0.6% over the month, the biggest monthly surge since March. Is it any surprise then to see the prices paid component rose again in November to hit 58.2 even as most other components came in a little weaker in November. (…)

The challenge confronting policymakers is how to slow growth in the service sector without completely extinguishing it and without keeping policy too restrictive for manufacturing and other rate-sensitive parts of the economy.

Election results are showing signs of influencing service-related sentiment with implications for prices. A respondent from the information sector noted “concern after the presidential election that tariffs will affect prices for electronics and components in 2025.” A different respondent drew a comparison to another period of supply disruption saying “Election results and the potential tariff changes would impact inventory and lead to higher prices in the hospital supply chain.” What we saw during COVID-19 with startup U.S. production is a warning sign again.

ING’s take on the ISM:

The November reading of the US ISM services index is quite a bit weaker than predicted. The headline balance dropped to 52.1 from 56.0 versus a consensus forecast of 55.7.

This is the weakest reading for three months, but at least it remains above the break-even 50 reading. Business activity declined 3.5 points to 53.7 while new orders fell 3.7 points, also to 53.7.

This is a disappointing outcome with the ISM attributing the softening to “election ramifications and tariffs… with cautionary outlooks related to the potential impact on respondents’ specific industries”.

On balance it is supportive of the rate cut narrative at the December FOMC meeting and suggests a cooling in economic growth in the fourth quarter, especially with the manufacturing ISM index remaining in contraction (sub 50) territory.

But S&P Global’s survey reads very differently: New order growth strongest since April 2022

The seasonally adjusted S&P Global US Services PMI Business Activity Index rose to 56.1 in November, up from 55.0 and above the 50.0 neutral mark for the twenty-second consecutive month. The latest expansion was the fastest since March 2022, fueled by the largest rise in new business in just over two-and-a-half years.

Some firms indicated that the result of the Presidential Election, and end of the uncertainty that had been evident in the lead-up to the vote, had provided the impetus for customers to commit to new orders.

In some cases, lower interest rates had contributed to the rise in new business.

Total new orders were supported by a fifth consecutive monthly increase in new business from abroad, which rose at a faster pace than in October.

Despite stronger increases in output and new orders, service providers again indicated a reluctance to hire additional staff in November. Employment decreased for the fourth month running. Although the pace of job cuts was only slight, generally reflecting the non-replacement of leavers, it quickened to the fastest since August.

The combination of accelerated growth of new work and reductions in staffing levels meant that backlogs of work accumulated, the second time in the past three months in which this has been the case. Moreover, November’s rise in outstanding business was solid and the most pronounced since May 2022.

Higher staff costs were again a key driver of rising input prices in the service sector, while increased transportation costs were also mentioned. Input prices rose sharply in November, albeit at the slowest pace since June.

The rate of output price inflation also slowed, easing to the weakest in the current four-and-a-half year sequence of rising charges. Although some companies increased selling prices in response to higher costs, others lowered charges amid competitive pressures.

Companies remained optimistic that business activity will increase over the coming year, with positive sentiment in part linked to an anticipation that the incoming administration will help the business environment. New product launches, marketing plans and hopes for reductions in interest rates were also factors supporting optimism. That said, confidence dipped slightly from that seen in October and was below the series average.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

“Improved service sector output offset a further decline in manufacturing during November, helping drive the overall pace of growth of business activity to the fastest for over two and a half years. The recent survey data are consistent with GDP growing at an annualized 2.6% rate in the fourth quarter, assuming a similarly robust expansion is seen in December. (…)

“It was surprising to see employment continue to fall, given the strength in demand for services reported during November, which hints at ongoing labor supply issues and the potential for stubborn wage growth. However, despite another month of above-average input cost inflation in the services sector, average prices charged for services rose only very slightly amid increased competition.”

I still put more weight on S&P Global’s vs the very volatile ISM surveys.

Powell Says Economic Strength Gives Fed Ability to Take Time on Rate Cuts ‘The economy is strong, and it’s stronger than we thought it was going to be in September,’ said the Fed chief

Federal Reserve Chair Jerome Powell said the economy looks better now than it did when the central bank began cutting interest rates in September, which means the Fed can move more slowly in reducing borrowing costs.

“We wanted to send a strong signal that we were going to support the labor market if it continued to weaken,” Powell said during a moderated question-and-answer session hosted by the New York Times on Wednesday. “The economy is strong, and it’s stronger than we thought it was going to be in September.” (…)

“The good news is that we can afford to be a little more cautious as we try to find” a rate-setting that neither spurs nor slows growth, Powell said.

Powell didn’t comment directly on the December meeting. Officials begin their traditional pre-meeting quiet period at the end of this week. Before their meeting, they will have November readings from the Labor Department on employment, due this Friday, and inflation, due next week. On Monday, Fed governor Christopher Waller said he was leaning towards supporting another cut at that meeting because rates would still be at a level that should slow economic activity. (…)

Note: Travelling week.

US Job Openings Pick Up to 7.7 Million as Labor Demand Steadies Quits rose and layoffs eased, also showing stabilization

US job openings picked up in October while layoffs eased, suggesting demand for workers is stabilizing.

Available positions increased to 7.74 million from a revised 7.37 million reading in September, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, known as JOLTS, showed Tuesday. The median estimate in a Bloomberg survey of economists called for 7.52 million openings.

The advance in openings was led nearly entirely by professional and business services and accommodation and food services.

The overall uptick followed months of steep declines — including a big drop in September. The levels of layoffs decreased to the lowest since June, while quits picked up to the highest since May, indicating workers are more confident in their ability to find a new job.

While companies like Boeing Co., General Motors Co. and Cargill Inc. have either recently cut jobs or announced plans to do so, there are few signs of a broad pickup in layoffs. (…)

The number of vacancies per unemployed worker, a ratio the Fed watches closely, was little changed at 1.1, in line with pre-pandemic levels. At its peak in 2022, the ratio was 2 to 1.

Friday brings the November jobs report, the final major labor-market update before the Federal Reserve’s Dec. 17-18 meeting.

October’s job openings rose 372,000 to 7.74 million (chart). While hires fell by 269,000, layoffs decreased 169,000 and quits increased by 228,000. Bad weather, labor strikes, and uncertainty regarding the US elections probably depressed hiring in October. Still, the labor market’s broad resilience in the face of those pressures is significant. More workers quitting their jobs suggests they are confident about their ability to earn higher wages elsewhere. The animal spirits unleashed by Trump 2.0 should boost hiring during the final three months of this year and well into next year, in our opinion. (Ed Yardeni)

Indeed Job Postings stabilized during the summer but seems back on its downtrend (through Nov. 29):

CONSUMER WATCH

Santa’s got a brand-new bag, or two. U.S. consumers did what they do best over the long weekend, shelling out a record $10.8 billion on Black Friday according to Adobe Analytics, up a brisk 8.2% year-over-year.  Spending on so-called Cyber Monday rose more than 13% to $13.3 billion, while total holiday season expenditures will reach $240.8 billion if Adobe’s forecasts are on point, representing an 8.4% uptick from 2023.

Largely stable household debt levels further color those impressive growth rates, with the total tab rising a modest 3.8% year-over-year in the third quarter per Moody’s, trailing the 4.9% and 4% expansions in nominal GDP and nonfarm wages, respectively, over the same period.  Credit card balances rose at an 8.1% annual clip to a record $1.17 trillion, though Bloomberg notes that such borrowings as a share of income stand at 8%, in line with the pre-pandemic ratio. (Almost Daily Grant’s)

China Services Activity Gauge Signals Continued Growth, Optimism The Caixin services purchasing managers index came in at 51.5 in November, edging down from 52.0 in October

(…) Both supply and demand in the sector continued to grow, but at a marginally slower pace, according to Caixin. Business activity and total new orders followed suit, while overseas demand growth decelerated for a second straight month, the data indicated.

Employment in the services sector grew for a third consecutive month in November, but was limited despite continued increases in total new orders.

As Beijing’s more aggressive stimulus efforts start to kick in, sentiment among service providers has improved markedly, with the gauge for future expectations rising for a second month. (…)

Wednesday’s readings are in line with the official gauge released previously. China’s official nonmanufacturing PMI, which covers both service and construction activity, fell to 50.0 in November from 50.2 in October. The subindex tracking service activity stayed unchanged at 50.1, suggesting continued expansion.

Both the official and Caixin PMI readings for the manufacturing sector came in stronger in November, pointing to a solid burst of activity, which may have been aided in part by the front-loading of shipments ahead of potential U.S. tariffs. (…)

  

• The new business index fell to 51.8 in November (52.1 in October) and the outstanding business index edged down to 50.5 in November (50.7).
• The new export orders sub-index moderated slightly to 52.7 in November (52.9 ).
• The employment sub-index remained unchanged at 50.2 in November.
• Price indicators suggest inflationary pressures eased in November. The input prices sub-index fell to 50.1, the lowest level since July 2020 (52.1 in October).
• The output prices sub-index fell to 49.6 (50.0) on lower cost inflation and heightening competitions.

Eurozone economy slips back into contraction in November

After recovering slightly to register 50.0 in October, the seasonally adjusted HCOB Eurozone Composite PMI Output Index fell back into contraction territory during November. At 48.3, the headline index signalled a renewed downturn in private sector business activity across the eurozone. Moreover, albeit only modest, the decrease in output was the fastest for ten months.

Central to November’s drop in activity levels was the service sector, which posted its first decline in output since the beginning of the year. Factory production volumes fell for a twentieth successive month, the longest sequence of contraction in the survey history.

The eurozone’s big-three economies of Germany, France and Italy all registered contractions in business activity midway through the final quarter of 2024. The other euro area nations which have Composite PMI available – Ireland and Spain – posted expansions, with the former registering the strongest growth in output for two-and-a-half years.

Economic activity levels were stifled by a sustained reduction in demand for goods and services, latest data showed. For a sixth month running, intakes of new work shrank across the eurozone in November. Additionally, the pace of decline was the steepest in the year-to-date.

Both manufacturers and service providers reported lower volumes of new business, although factory sales fell by a considerably stronger margin. Export performance was a heavy drag on the euro area economy, with new orders from non-domestic customers falling at a faster pace than that of total sales.

With demand trending lower, the onus on backlogs as a means to sustain activity levels increased. Subsequently, outstanding order volumes decreased in November. This marked the twentieth month in succession that work-in-hand has fallen. The rate of backlog depletion was broadly level with those seen in both October and September, and therefore among the fastest in 2024 so far.

Regarding jobs, the latest HCOB survey data revealed further cutbacks by firms in the eurozone. The reduction in staffing levels was only marginal, but nevertheless the second-fastest since December 2020 (behind October). The decline in employment was driven entirely by manufacturers, as the pace of job creation ticked higher in the service sector.

When looking towards the next 12 months, eurozone companies registered positive expectations on balance. However, the degree of optimism waned to its lowest in a year and was much weaker than its long-term average.

Lastly, November saw inflationary pressures creep up across the euro area. For a second successive month, rates of increase in both input costs and output prices accelerated and were at their most marked since August. That said, price increases were seen only in the service sector, while goods producers registered cost reductions and discounts to their own prices.

The HCOB Eurozone Services PMI Business Activity Index posted below the 50.0 no-change mark for the first time since January in November. Falling to 49.5, from 51.6 in October, the index signalled the first decrease in service sector output for ten months. However, the contraction was only marginal overall.

Demand for eurozone services weakened for a third straight month in November. Furthermore, the decline was the quickest since January. New business from non-domestic sources provided a sharper drag on total orders, with the respective HCOB index at a 13-month low.

Services employment continued to rise across the eurozone, however, sustaining a run of job creation that stretches back almost four years. This was despite backlogs of work falling for a seventh straight month, suggesting service providers have spare capacity.

Meanwhile, confidence levels weakened in November. Expectations for growth were at their softest since September 2023.

Turning to prices, the latest survey data showed an uplift in pressures as both input cost and output charges increased at faster rates than in the previous month. Compared to their respective pre-pandemic trends, inflation rates were elevated in both cases.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

“Stagflation is a pretty nasty word, especially if you are a central banker, but that is what is hitting the eurozone right now. In November, the economy started shrinking while the PMI price components went up for the second month in a row. Inflation is mainly driven by services, but with the euro getting weaker, there is a risk that the prices of imported goods might start climbing too in the coming months.

“The European Central Bank (ECB) is in a tough spot. The economy is struggling and really needs some monetary support. However, inflation is stubbornly high, as highlighted by significant wage increases in the third quarter. So, the ECB is likely to avoid aggressive rate cuts and instead might carefully lower rates by 25 basis points on December 12.

“The services sector, which had been holding up the overall economy, is now shrinking for the first time since January. This is bad news for overall growth prospects, especially since this weakness is seen across the top-three euro economies. This broad-based decline might be due to consumer uncertainty, fuelled by political issues in France and Germany and the threat of trade wars linked to Donald Trump’s election in the US. Our GDP nowcast, which includes PMI data among other indicators, predicts stagnation in the final quarter of 2024.

“An early recovery in the services sector doesn’t seem likely, as new business has dropped for the third consecutive month. Although employment saw a slight uptick in November after nearly stagnating the previous month, this shouldn’t be seen as a sign of recovery. Most other indicators suggest more challenging times ahead.”