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.