EDGE AND ODDS’ Almost DaiLY Chat (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): November 6, 2024
U.S. PMI Services:
S&P Global: October sees further marked increase in business activity
The seasonally adjusted S&P Global US Services PMI® Business Activity Index signaled further strong growth of service sector output in October, ticking down only slightly to 55.0 from 55.2 in September. Activity has now increased in each of the past 21 months.
The latest rise in activity coincided with a further solid expansion in new business, with companies reporting the securing of new clients and a willingness among customers to commit to new projects. New orders rose for the sixth month running, with the rate of expansion broadly in line with that seen in September.
The rise in total new business was much faster than that seen for new export orders, as subdued international demand meant that new business from abroad increased only marginally and at the slowest pace in the current four-month sequence of growth.
Business confidence rebounded in October, rising to the highest since June. Hopes of improved demand conditions following the Presidential Election supported confidence, with lower interest rates also predicted to feed through to growth of activity.
While new orders and business activity continued to rise, firms remained reluctant to expand staffing levels. Employment was down for the third month running. The latest fall was only marginal, however, as some companies did take on additional workers, in part through the backfilling of vacant positions.
Despite the restraint on hiring, companies were able to keep on top of workloads, meaning that outstanding business was unchanged in October following a rise in September.
As part of efforts to secure sales, companies limited the pace at which they raised their selling prices. The rate of output price inflation slowed sharply and was the joint-weakest in nearly four-and-a-half years of rising charges, equal with that seen in January.
Where output prices were increased, this reflected the passing on of higher input costs, which continued to rise sharply and at a pace that was above the series average. Respondents indicated that higher staff costs had been the main factor pushing up input prices.
The S&P Global US Composite PMI Output Index ticked up to 54.1 in October from 54.0 in September, registering a further solid increase in business activity at the start of the final quarter of the year.
The overall expansion again reflected marked increases in services activity as manufacturing production continued to fall.
Modest reductions in employment across both monitored sectors meant that overall staffing levels decreased for the third month running.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence :
(…) “The services economy’s consistently impressive growth in recent months has helped the US outperform all other major developed economies. October’s strong performance is consistent with GDP continuing to rise at an annualized rate in excess of 2%.
“Particularly welcome news comes from the cooling inflation picture. Average prices charged for services rose at a sharply reduced rate in October, showing one of the smallest increases seen for over four years, as competition intensified in the services economy. (…)
ISM Riddle for the Fed: Service Activity Soars as Factories Slump
Coming on the heels of last week’s manufacturing ISM, which showed yet another month in contraction, today’s ISM services report showed an increase to 56.0, or the broadest pace of service sector expansion since the summer of 2022. The gap between the two bellwethers is the second largest on record and has not been so large in more than 22 years. (…)
New orders also worked against the grain, coming down two points to a still-expansionary reading of 57.4. The upswing in the composite likely reflects employment swinging from a net drag in September to a net boost in October. (…)
The employment component rose nearly five points to 53.0 last month which is consistent with the broadest expansion in services-hiring since the summer of 2023. Recall, it was just last week that employers reported adding just 12,000 net new jobs in the very same month.
Note that survey participants mentioned that their businesses were negatively affected by hurricanes and port strikes. Yet, the PMI rose from 54.9 to 56.0, highest since 2022.
CONSUMER WATCH
From The Transcript:
- “In the U.S., total payments volume grew 5% year-over-year, in line with Q3… Consumer spend across all segments from low to high spend has remained relatively stable to Q3. Our data does not indicate any meaningful behavior change across consumer segments from last quarter.” – Visa ($V ) CFO Christopher Suh
- “I mean the consumer continues to be healthy. We continue to see positive trends from a consumer health standpoint. They’re spending in a very healthy manner… there’s no doubt in my mind that the consumer continues to show strength.” – Mastercard ($MA ) CFO Sachin Mehra
- “There’s no doubt about that. I mean, I think consumers are under pressure… I think consumers continue to be discerning with where and with whom they’re spending money… certainly lower-income consumers and families are consumers that are under more acute kind of pressures.” – McDonald’s ($MCD ) Global CFO Ian Borden
- “While mortgage rates have decreased from their highs earlier this year, many potential homebuyers expect rates to be lower in 2025. We believe that rate volatility and uncertainty are causing some buyers to stay on the sidelines in the near term.” – DR Horton ($DHI ) CEO David Auld
- “Consumers remain trepidatious in their spending patterns and are demonstrating more price elasticity than we saw in the early months of the year… we were seeing a broader pullback by shoppers in the lead up to the election.” – Wayfair ($W ) CEO Niraj Shah
Ed Yardeni:
By the way, consumers’ plans to buy cars in the coming months surged in October as well. The jump in plans to buy used cars could put upward pressure on used car prices. And, the percentage of consumers intending to take foreign vacations is around record highs. Clearly US consumers are planning to keep spending. Adding additional fiscal and monetary stimulus to the mix could result in a sugar high.
Restaurant sales are booming, up 7.4% YoY in August after +6.0% in Q2 and 7.0% in Q1 well above price increases:
This while fast-food chains are struggling:
Data: Company earnings reports; Chart: Axios Visuals
Canada: Service sector expands marginally in October
In October, the seasonally adjusted Business Activity Index moved back above the crucial 50.0 no-change mark to signal a return to growth of service sector output. The index posted 50.4, compared to 46.4 in September, thereby signalling a marginal expansion, but nonetheless the first rise in activity since May. Latest sub-sector data revealed that growth was especially strong in the Finance & Insurance and Business Services sectors.
New business volumes also improved slightly during October for the first time in five months. Panellists commented that market demand was firmer, with sales also supported by the opening of new services and commercial actions. New export business remained weak however with sales to foreign clients down markedly again in the latest survey period, albeit to a lesser extent than in September.
The net increase in overall new work led firms to hire additional staff in October. Although marginal, it was the first time that staffing levels have improved in three months and growth was the best since June. Additional capacity helped firms to keep on top of their workloads, with levels of work outstanding declining for a twenty-eighth successive month. The rate of contraction was solid, though eased since September.
Service providers pointed towards higher salary costs as a source of accelerated input cost inflation in October. Overall, operating expenses rose to the greatest degree for a year with respondents noting that vendors were increasingly willing to increase prices. Several service providers sought to protect margins by raising their own charges, although competitive pressures served to limit pricing power. Output charge inflation subsequently remained modest in the latest survey period and unchanged since September.
Finally, confidence in the outlook remained positive during October, with sentiment edging up to its highest level since March. Expected cuts in interest rates, plus greater political stability both at home and abroad, were cited as reasons that could support higher business activity in the year ahead.
There was a return to marginal growth of Canada’s private sector economy in October following four months of contraction. This was highlighted by the S&P Global Canada Composite PMI Output Index* improving to 50.7, from 47.0 in September. Both goods producers and service providers recorded growth in output.
Higher activity reflected similar-sized increases in new business volumes, and this was sufficiently encouraging for firms to hire additional staff. Overall, the size of the private sector workforce expanded in October for the first time in three months. Rising staff costs meant input price inflation accelerated to a one-year high, although competitive pressures meant output charges rose only modestly.
Confidence in the outlook improved slightly meanwhile, reaching its highest level since March. Firms looked towards lower interest rates to underpin growth in the year ahead.
Eurozone economy starts fourth quarter in stagnation
The seasonally adjusted HCOB Eurozone Composite PMI Output Index recorded 50.0 in October, which indicates no change in private sector output levels when compared with the month prior. This did mark an increase from 49.6 in September but was well beneath the survey average of 52.5.
The stagnation of the euro area economy masked considerably different trends at a sector level, however. Services activity rose for a ninth straight month and growth even ticked slightly higher, while manufacturing production decreased solidly.
Of the eurozone nations which have Composite PMI available, the October survey data showed mixed results. It was the currency bloc’s two biggest economies, Germany and France, which continued to drag on the union’s performance. However, while France fell deeper into contraction, Germany’s downturn cooled.
Declines in activity in these two nations were sufficient to counteract growth elsewhere across the euro area. Spain remained the fastest-growing euro area country in October, despite a slight loss of momentum. Ireland and Italy saw modest upturns, with the latter signalling a renewed expansion.
The level of new work received by private sector firms in the eurozone shrank for a fifth successive month as the final quarter of 2024 got underway. A sharp (albeit softer) deterioration in demand for goods was accompanied by the quickest drop in sales at services companies since January. Factory order books fell at a much stronger margin than that seen for services, in part due to manufacturers experiencing a more pronounced drag on sales from abroad. Aggregate new export business decreased for a thirty-second month in a row during October.
October saw the volume of outstanding business across the euro area shrink as lower demand allowed firms to focus more resources on backlogged orders. The monthly reduction, which was the nineteenth in a row, was solid overall and broad-based by sector.
Subsequently, euro area companies lowered their staffing capacity at the start of the fourth quarter. Albeit marginal, the rate of job shedding was the quickest since December 2020. Cuts to headcounts were exclusive to goods producers, although employment came close to stalling in the service sector.
Surveyed companies in the euro area were less optimistic towards the 12-month outlook for business activity in October. In fact, business confidence weakened for the fifth month running and was at its lowest in the year-to-date.
HCOB PMI data meanwhile indicated a continuation of benign cost pressures across the euro area. In addition to being well below its long-run average, the rate of input price inflation held close to that seen in September and was the third-softest for nearly four years. Eurozone companies raised their prices charged, but only modestly and to the second-slowest extent since February 2021.
The HCOB Eurozone Services PMI Business Activity Index edged slightly higher in October to 51.6, from 51.4 in September, therefore moving further inside expansion territory (above 50.0). Overall, this pointed to a modest and accelerated expansion in services activity across the euro area, although the pace of growth was subdued by historical standards.
Demand presented a drag for service providers in the single-currency market in October. New business receipts fell for a second month running and at the quickest pace since January. Sales made to non-domestic customers weakened in particular, with the respective HCOB index for new export orders registering beneath that for total new business. The decline in new business from abroad was the sharpest for ten months.
Backlogs of work across the service sector declined as less incoming new orders led firms to clear those pending completion. Employment levels rose nonetheless, although the rate of job creation was marginal and the weakest since February 2021. When anticipating activity levels in 12 months’ time, survey respondents were optimistic of growth, although the degree of confidence slipped compared to September.
Lastly, October survey data showed accelerated increases in input costs and output charges, although rates of inflation held close to the lows seen in September.
Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
(…) “It is not clear if stagnation of the Eurozone economy will be prevented given the Composite PMI recorded 50.0 in October. Our GDP nowcast for the fourth quarter, based on the PMIs and several other indicators, signals a slight contraction, although GDP growth is still possible if the manufacturing sector improves over the next two months, for which the October figures provide some, albeit very tentative, hope.
“Christine Lagarde, President of the European Central Bank, noted at the last ECB press conference that services inflation remains rather sticky. The PMI price indicators support this view. Costs rose at a faster pace in October than in previous months, as did selling prices. In our view, this stickiness is a structural problem related to the demographically induced labour shortage, which is exerting upward pressure on wages. The ECB will find it difficult, if not impossible, to achieve the 2% inflation target in a sustainable manner in this environment.”
China’s provinces push personnel to meet targets as end of year approaches Local governments in China are urging officials to spare no effort in meeting annual economic targets as 2024 nears its end
Chinese localities are redoubling their efforts to meet annual targets for economic growth in the final quarter of the year, calling on officials to accelerate investment, enhance consumption, and increase foreign trade as the window of opportunity begins to narrow.
The southern island province of Hainan, in a meeting of its standing committee on Sunday, emphasised the importance of doing “everything possible” to achieve this year’s economic and social development goals. The committee, the province’s highest political authority, urged government personnel to take a “no excuses” attitude and “make every second count,” according to a statement released after the session.
The committee also instructed officials to “stay sharply focused” on year-end targets, and “use extraordinary measures to spur economic growth and development.” (…)
The provincial meetings follow a speech by President Xi Jinping to senior officials at the Central Party School – China’s foremost ideological training centre – last Tuesday, where he instructed cadres at all levels to do their utmost to reach annual economic targets. (…)
Quarterly growth has slowed consistently over the year, down from 5.3 per cent in the first quarter to 4.7 per cent in the second and 4.6 per cent in the third.
Economists say growth in the final quarter would need to rebound sharply to reach the annual target – with estimates ranging from 5.2 to 5.4 per cent – a daunting task as the nation continues to grapple with a prolonged slump in the property market, hefty debt burdens for local governments and weakened demand across sectors. (…)
Shenzhen, often referred to as “China’s Silicon Valley”, a city of 17.8 million people just across the border from Hong Kong, saw its gross domestic product increase by 5.4 per cent over the year’s first three quarters while outpacing the country’s overall growth for the same period, according to an online statement by the city government on Tuesday. (…)
Dozens of companies based there are now on Washington’s so-called Entity List, which comprises companies and individuals, from a range of countries, that are seen as representing a threat to US national security.
Despite sanction risks, Shenzhen’s hi-tech sector has continued to show robust growth. Its investment in hi-tech manufacturing surged by 42.2 per cent in the first nine months – more than four times the national average. (…)
Shenzhen now boasts 34 unicorn companies – start-ups valued at more than US$1 billion – similar to the total number in Germany, according to a study by the Hurun Research Institute in April.
Shenzhen’s research and development investment accounted for 5.81 per cent of its GDP.
Trade is another key growth driver for Shenzhen. The value of the city’s exports rose by 19.7 per cent to 2.1 trillion yuan in the first three quarters.
According to the Shenzhen government, private enterprises accounted for 70 per cent of this growth.
Shenzhen is currently the world’s leading city for Amazon sellers, hosting more than 102,000, which is 3.6 times higher than second-place Guangzhou, according to the latest data by SmartScout, an analysis tool for Amazon.
25bps Cut? We Strongly Dissent!
We may not know tonight who will be the next president, but we should know which party will win a majority in the Senate and the House. It appears that Republicans are likely to do so. In this case, a Harris administration would be gridlocked, while a Trump administration would have more power to implement his policies, including higher tariffs (raising inflation risks) and lower taxes (ballooning the federal deficits). That could push the 10-year yield up to 4.75%-5.00%, which should attract lots of buyers.
Meanwhile, the Fed is widely expected to cut the federal funds rate (FFR) by 25bps on Thursday. If we were on the Federal Open Market Committee (FOMC), we would strongly dissent in favor of a pause. By most measures, including today’s nonmanufacturing PMI report, the economy has been roaring even before the Fed’s September 18 meeting when the FFR was cut by 50bps.
When the Fed cut by 50bps rather than 25bps on September 18, we immediately concluded that was too much, too soon. The Bond Vigilantes have agreed with our assessment, raising their expectations for long-term inflation and taking the 10-year US Treasury yield from 3.65% on September 16 to 4.44% this evening. (…) (Ed Yardeni)
Goldman Sachs:
Donald Trump has won the White House and Republicans have won a larger-than-expected majority in the Senate. The outlook for the House is still unclear but leans toward a very narrow Republican majority and therefore a Republican sweep. This is likely to lead to a modest fiscal expansion, increased tariffs primarily focused on China, and lower net immigration levels. (…)
If Republicans win a narrow majority in the House, this would allow for full extension of the 2017 tax cuts that expire at the end of 2025, likely including reinstatement of some expired business investment incentives. We expect that congressional Republicans would support modest additional tax cuts to accommodate some of Trump’s campaign proposals, but expect these proposals would be scaled down and would cut taxes by a few tenths of a percent of GDP, primarily focused on individual income taxes (not corporate).
In a Republican sweep, we would also expect federal spending growth to rise somewhat, particularly on defense. While a larger Senate margin (e.g. 55 or 56 seats) could result in greater Republican support for spending cuts in other parts of the budget (i.e., “mandatory” spending on benefit programs), the thin margin in the House might nevertheless pose an obstacle to such plans.
By contrast, in the less likely scenario that Democrats win a very slim House majority, we would expect somewhat greater fiscal restraint as the modest net tax cuts we expect under a Republican sweep would be unlikely, and some of the upper-income tax cuts would be more likely to expire at the end of 2025.
On tariffs, we would expect Trump to impose tariffs on imports from China that average an additional 20pp. While the 10-20% across-the-board tariff that Trump has proposed is not our base case, we believe it is very possible (40% chance) that such a tariff will be implemented. We expect auto tariffs to come into focus and we assume tariffs on auto imports from the EU, though this could be applied more broadly. We estimate that this combination of tariff policies would provide a one-time boost to core PCE inflation that peaks at 30-40bp and a modest drag on GDP.
On immigration, we expect an incoming Trump administration will reduce immigration to around 750k/year, slightly below the 1mn pre-pandemic trend. In the event that Democrats manage to win a narrow House majority, we would expect immigration to decline less, to a pace around 1.25mn/yr. The difference arises from the greater enforcement funding a Republican-controlled Congress would likely approve that would be unlikely in a divided government scenario.
On regulation, an incoming Trump administration would likely take a lighter-touch approach, particularly with regard to energy, financial, and labor policies. By contrast, while some aspects of antitrust policy might ease slightly, we would expect scrutiny of the tech sector to continue.
ING:
Reduced immigration and forced repatriation could become a major constraint on the US economy, particularly in industries such as agriculture. American-born worker numbers are falling and are a million lower than in 2019. The downtrend in US birthrates suggests little prospect of a demographic-driven turnaround.
Employment growth is coming from foreign-born workers, who now make up 19.5% of all US employees. If the foreign-born workforce also shrinks, it could create significant supply-side challenges, driving up wages and inflation. To counteract this, productivity would need to increase substantially. Additionally, fewer active people in the country would mean reduced economic demand.
American-born workers are falling in numbers, foreign-born are rising (millions)
Source: Macrobond, ING
(…) We suspect that the economic implications from reduced population growth, global trade protectionism and the prospect of higher borrowing costs will make it difficult for the US economy to grow rapidly enough to generate tax revenues to fully cover Trump’s fiscal plan.
At the same time, the Federal Reserve may take the view that if fiscal policy is going to be loosened relative to their previous baseline forecast then it needs to run monetary policy tighter, implying a higher neutral interest rate to keep inflation at its 2% target. An environment of higher inflation from tariffs could amplify the risk of a higher, steeper yield curve over the next four years relative to what the US economy has experienced over the previous decade.
That said, we have to remember that Jerome Powell’s term as Fed Chair ends in February 2026 and with the Republicans controlling the Senate President Trump has an easy pathway to nominating and installing a candidate that is more willing to accommodate his views on interest rate policy. One example could be a more compliant Fed that is willing to adopt some form of “yield curve control” should higher Treasury yields threaten to undermine the growth story. Nonetheless, such action risks damaging the central bank’s credibility, potentially prompting an adverse market reaction.
Of course, what Trump proposes during an election campaign and what he eventually delivers as president may be very different. Our view is that while the growth trajectory in the near term looks fine, the more aggressive he goes on fiscal and immigration policies the more challenges this may present for the US economy over time.
A looming new trade war could push the eurozone economy from sluggish growth into a full-blown recession. The already struggling German economy, which heavily relies on trade with the US, would be particularly hard hit by tariffs on European automotives. Additionally, uncertainty about Trump’s stance on Ukraine and NATO could undermine the recently stabilised economic confidence indicators across the eurozone. Even though tariffs might not impact Europe until late 2025, the renewed uncertainty and trade war fears could drive the eurozone economy into recession at the turn of the year. (…)
