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. (…)