U.S Services PMI: Business activity expands at slowest pace in nine months amid softer demand
U.S. service providers indicated a strong expansion in business activity during September, according to the latest PMITM data. That said, the slowest rise in new business for 13 months and labour shortages hampered output growth, as the upturn softened to the weakest in 2021 to date. Total sales were weighed down by the spread of COVID-19 and a faster decline in new export orders. At the same time, pressure on capacity was reflected in the sharpest rise in backlogs of work since data collection began almost 12 years ago. Challenges expanding workforce numbers reportedly exacerbated difficulties clearing incoming new business.
Meanwhile, cost pressures built for a second month running as input prices rose at a steep rate. Firms continued to pass on higher costs to clients, but at the slowest pace for five months.
The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 54.9 in September, slightly higher than 54.4 posted by the earlier released ‘flash’ estimate but down from 55.1 in August. Output growth remained strong overall, despite softening to the slowest in nine months. Where an increase in business activity was reported, firms linked this to a sustained rise in client demand. The expansion was, however, hampered by insufficient capacity to process new work as well as demand having been subdued by COVID-19, notably in the hospitality sector.
Service providers signalled a solid upturn in new business during September, as firms noted the acquisition of new clients and further customer demand supported sales. That said, the rate of growth slowed further from the highs seen earlier in the year to a 13-month low.
At the same time, foreign client demand weakened again as new export orders fell for a second month running. The rate of contraction was solid overall and the fastest in 2021 so far.
In line with a sustained increase in new business, service sector firms registered another expansion in backlogs of work at the end of the third quarter. Difficulties processing new sales were worsened following significant labour shortages and transportation delays. The rate of growth in outstanding business was the fastest in the near 12-year series history.
Despite many reports of efforts to expand workforce numbers, service providers registered only a fractional rise in employment during September. The pace of increase was the second-slowest in the current 15-month sequence of job creation.
On the price front, the pace of cost inflation accelerated to the fastest for three months. Higher input prices were commonly attributed to greater supplier and transportation costs, alongside an increase in wage bills.
In contrast, the rate of charge inflation softened in September. Although marked, the pace of increase eased to the slowest since April following efforts by some firms to attract new business by waving certain fees.
Business expectations regarding the outlook for activity over the coming 12 months improved during September. Hopes of a reduction in COVID-19 cases and a further boost to client demand reportedly drove optimism. The degree of confidence was historically elevated and the strongest since June.
The IHS Markit U.S. Composite PMI Output Index posted 55.0 in September, down from 55.4 in August to signal a strong, albeit slower expansion in private sector business activity. The rate of growth was the softest in a year amid slower upturns in both monitored sectors.
New business increased further during September, but the rate of expansion eased to the slowest in nine months. Manufacturers and service providers alike registered softer upticks in client demand. Goods producers reported a quicker rise in new export orders, which contrasted with a faster contraction in service sector foreign customer demand.
Labour shortages continued to hamper output growth across the private sector. Although rates of job creation quickened in the individual sectors, employment growth was historically subdued. At the same time, constraints on capacity were reflected in a series-record expansion in backlogs of work.
Meanwhile, inflationary pressures remained historically elevated as input costs and output charges rose markedly. The overall pace of charge inflation eased in September amid a slower rise in service sector selling prices.
Fading momentum:
Consumer Goods producers saw the biggest loss of momentum, with the index slipping from 57.2 to 52.8 in September. This pointed to the weakest rate of output growth since August 2020, which largely reflected shortages of materials due to the global supply chain crisis.
Financials saw only modest growth and its weakest overall performance since July 2020. However, the slowest-growing sector was Technology (50.7), followed by Consumer Services (52.1). Both categories posted much weaker expansions during September, which added to the considerable loss of momentum since record-high growth rates were achieved in May.
The Atlanta Fed’s GDPNow is diving:
The consensus for Friday’s Non Farm Payroll is +470k and vs. +235k in August. The hope is that the general economic reopening will more than offset fading leisure + hospitality tailwinds. Many hope that the termination of federal enhanced unemployment benefits running will ease some of the worker shortages.
As I wrote on Monday, Market News International saw a St. Louis Fed analysis of real-time employment data from Homebase that suggests an 818k drop in September. That would be a real shocker, substantially boosting the stagflation scenario. I then pointed out that initial unemployment claims rose in each of the last 3 weeks and that all but one Fed district non-manufacturing activity surveys were weak in September.
Markit’s Services PMI: “service providers registered only a fractional rise in employment during September; the pace of increase was the second-slowest in the current 15-month sequence of job creation.” The slowest month was December 2020 (-306k); the second slowest was January (+233k).
A few more indicators also point to a weak September NFP report:
- Recent Google trends suggest that claims are up 5-7% WoW (after +3% last week and +5% the week prior).
- JPM’s job tracker based on various alternative data calls for +464k in September and +370k in October.
- Paychex | IHS Markit Small Business Employment Watch says that the pace of small business employment growth has slowed considerably from +0.85% in July to +0.45% in August and +0.15% in September. MoM growth rates by industry vary from -0.15% to +0.33%. Weekly hours have also weakened in September.
On the wage front, the Paychex data reveal that hourly earnings growth increased to 3.68% YoY in September, its fourth consecutive increase. It was +3.0% in June and +2.6% in December 2020.
The 20% increase affects BMO Harris Bank’s full- and part-time workers, including new hires and current workers who make less than the new [$18] minimum, Toronto-based Bank of Montreal said in a statement Tuesday. The change is effective Oct. 17. (…)
BMO Harris, the American personal-banking franchise of Canada’s fourth-largest lender, has more than 500 branches throughout the U.S.
- Target Dangles Extra $2 an Hour in Holiday Pay Amid Labor Crunch Store employees and some headquarters staff will get the extra pay on weekends from Nov. 20 through Dec. 19, as well as on Dec. 24 and 26, Target said Tuesday. Supply-chain workers can get the additional pay during a two-week period from Oct. 10 to Dec. 18, with the exact timing varying by location.
INFLATION
PepsiCo Inc. PEP 0.59% said it raised its guidance for the full year amid strong sales growth of its Mountain Dew, Doritos and other snacks, while the company faces continuing supply-chain disruptions and increased costs for aluminum cans, plastic bottles, labor and trucking. (…)
PepsiCo will continue to pass on its higher costs to consumers with price increases this fall and early next year, finance chief Hugh Johnston said. Consumers around the world are more willing to accept price increases now than they were in the past, said Chief Executive Ramon Laguarta, perhaps in part because they are shopping more quickly in stores and might not be looking as closely at price tags. (…)
- John Authers: Read the Runes. Inflation Is Showing Some Staying Power
(…) Digging into the latest data release suggests that the risks of persistent inflation are increasing, while shifting politics in Washington D.C. suggest that we may soon have a new and relatively unfamiliar senior team at the top of the Fed to interpret those data. (…)
If policy makers are reading the metrics that their own research departments, dispersed across the continent, are producing, they will find reasons to be more hawkish. (…)
By the San Francisco Fed’s calculations, acyclical inflation [sudden shocks] actually went negative early in the pandemic, and then shot up to its highest level in many years. This confirms the intuition that a big part of this year’s inflation spike was indeed a transitory phenomenon that would soon be corrected. The good news is that acyclical inflation has indeed now begun to fall slightly from its peak. The bad news, which more than outbalances the good, is that cyclical inflation has now slightly overtaken it:
U.S. Trade Deficit Widens to Record as Imports Rebound The Commerce Department said the trade gap expanded to $73.3 billion in August, as U.S. consumers continued to show a strong appetite for imported goods such as pharmaceutical products, toys and clothing.
(…) Imports rose 1.4% in August to $287 billion, also a record high, reflecting higher shipments of consumer goods, as well as industrial supplies by business customers.
As many economies around the world continued to emerge from pandemic-related restrictions, exports also rose to $213.7 billion, up 0.5% from July. (…)
As a severe shortage of semiconductors forced auto makers to reduce their production, exports of vehicles and parts fell 8%, while imports also shrank 5.2%. (…)
The U.S. trade deficit with China widened to $31.7 billion in August—the largest gap since July 2019—from $28.6 billion the prior month. Exports declined while imports continued to grow. (…)
Eurozone retail sales saw disappointing rebound in August
After strong readings until June, July and August have now shown sales levels that are in line with the pre-crisis trend. August saw a 0.3% increase, which was below expectations and this comes after the sharp -2.6% decline in July.
This means that the consumer rebound has waned quickly over the summer months, which does not bode well for 3Q household consumption expectations. Without growth in September, retail sales will have only grown by 0.2% in 3Q after a 3.9% jump in 2Q on the back of reopenings.
The consumption outlook from here on gets a bit more muddled. With energy prices soaring, furlough schemes ending and rebound effects waning, we expect consumption growth to fade over the course of 4Q. We don’t expect anything dramatic though as there are still quite a few factors suggesting that above-trend growth in retail sales is feasible. Think of the high savings still accumulated by Europeans, the low unemployment rate and historically high consumer confidence. Nevertheless, it looks like retail sales have peaked in 2Q and that consumption is set for moderation from here.
FYI:
- Piper Sandler completes 42nd semi-annual Generation Z survey of 10,000 U.S. teens
- Global equities have seen $765bln of inflows year to date…this is the largest 9 month inflow ever by a factor of 3x. In fact equity inflows in the last 12 months have been larger than the prior 25 years cumulatively. (GS)
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TECHNICALS WATCH: Yesterday’s rally was unimpressive with rather modest demand stats. Small-caps’ relative weakness kept breadth weak.
- Taipei warns that China will be able to invade Taiwan by 2025 President Tsai Ing-wen appeals to democracies to help the island defend its independence
- How South Dakota became a global tax haven The hundreds of billions of dollars sequestered in South Dakota trusts generate no taxes and are effectively off limits to anybody who might have a legitimate claim on them.
A South Dakota trust is “the most potent force-field money can buy,” in the words of the Guardian’s Oliver Bullough.
- Like most tax havens, South Dakota has no income tax, no inheritance tax and no capital gains tax. But the state has gone even further than that. South Dakota allows for extreme secrecy when law enforcement comes knocking, and protects assets from being claimed by creditors, ex-spouses, or pretty much anybody else. (…)
- All three parties — the settlor, the trustee, and the beneficiary — can legally claim that the money isn’t theirs. The settlor and the beneficiary can say they don’t have the money, it’s all in a trust run by someone else. The trustee can say that she is just looking after the money and doesn’t own it.
South Dakota started carving out its position as the most laissez-faire state for financial services in 1981, when it abolished upper limits for credit-card interest rates. (That’s why the credit card in your wallet was almost certainly issued in South Dakota.)
- In 1983, South Dakota became the first state to allow perpetual trusts — money that can remain untouchable for centuries, with no one ever paying inheritance tax on it.
- Since then, South Dakota has continued to pass laws making its trusts more attractive to the world’s ultra-wealthy. It allowed trusts where the settlor and beneficiary can be the same person. It has also sealed all court documents setting up trusts, making it impossible to know — in the absence of Pandora Papers style leaks — who might have one.
- The Republican-controlled South Dakota legislature regularly rubber-stamps whatever bills are placed in front of it by the financial services industry. “Nobody understands any of them,” said Gene Abdallah, Republican chair of South Dakota’s Senate Judiciary Committee in 2007 — although it’s broadly understood that the laws help to support hundreds of financial-services jobs in Sioux Falls, as well as the lawmakers’ free-market bona fides.
Since 2010, almost every country in the world has signed onto the Common Reporting Standard (CRS), whereby governments inform each other about assets held by foreigners. The United States is the only major country not to sign on to the CRS, making it much more attractive as a tax haven than places like the Bahamas or Panama.
- Ecuadoran President Guillermo Lasso, Chinese real-estate billionaire billionaire Sun Hongbin, and dozens of other high-profile tax optimizers — both foreigners and Americans —are sheltering their assets in South Dakota.
A decade ago, South Dakotan trust companies held $57 billion in assets. The current figure is about $360 billion — with similar trusts in other states bringing the total for the U.S. close to $1 trillion.
- The United States — not only South Dakota but also rival tax-haven states like Nevada and Delaware — now ranks second only to the Cayman Islands for financial secrecy.
“South Dakota offers the best privacy and asset protection laws in the country, and possibly in the world,” tax expert Harvey Bezozi told the Guardian.