TERADAT SANTIVIVUT
Growth in U.S. business activity remained nearly stalled for a second straight month in September, according to flash PMI data compiled by S&P Global, suggesting the pace of economic growth moderated in the third quarter.
Businesses reported that demand remained under pressure due to the increased cost of living and higher interest rates, which particularly dampened growth in the services sector after robust growth at the start of the summer. Meanwhile, production remains in the doldrums.
Survey price data, meanwhile, suggests inflation remains stubbornly persistent, consistent with the CPI hovering around the 3% mark in the coming months, with higher oil prices posing some upside risks to inflation.
Wage growth also remains a widespread driver of inflation and job growth accelerated in September, reinforcing signs of labor market strength.
However, with residues of With the number of employees falling at a significant pace and future production expectations falling, the question remains as to how long companies will continue to increase their workforce at the current pace.
Slower growth
Business activity in the U.S. remained largely stalled in September for the second month in a row. At 50.1, down slightly from 50.2 in August, the headline S&P Global Flash US PMI Composite Output Index signaled the weakest bounce in activity since February and only modest expansion.
The low PMI readings in August and September suggest a more subdued picture of the US economy in recent months than the robust expansion in the second quarter.
While the overall PMI averaged 53.6 in the second quarter, the third quarter average fell to 50.8. This suggests a slowdown in annualized GDP growth from around 2% to 1% between the second and third quarters. The latest available GDP estimate is for second-quarter growth of 2.4%.
There has been some confusion recently regarding US GDP data, particularly due to a historically large spread between the GDP and GDI measures.
In theory, these two metrics should follow identical paths, with the former measuring output and the latter measuring income generated from that output.
While gross domestic product continued to show robust growth in the second half of 2022 and the first half of 2023, gross domestic income has taken a different, more worrying path that is much more in line with the PMI.
In fact, both the BDI and PMI signaled an economic contraction in the fourth quarter of 2022 and the first quarter of 2023, followed by a return to growth in the second quarter. Comparing the PMI with the BDI therefore suggests that the BDI could weaken again in the third quarter.
Interestingly, the PMI data also closely tracks the annual (year-on-year) change in GDP and therefore also suggests an annual slowdown in economic growth in the third quarter.
The malaise in the factory remains
Looking at industry trends, manufacturing production fell modestly in September, falling for the third time in the past four months, suggesting that the brief return to growth in U.S. factories earlier in the year – partially triggered by China’s reopening post-COVID-19 – has continued to falter, albeit only slightly for now.
However, further production downtimes may occur. While production was supported by factories fulfilling orders placed during the pandemic, aided by supply chain improvements, these accumulated backlogs have now steadily declined over the past year, in part due to a lack of new order additions.
New goods orders fell for the fifth consecutive month, leading to another significant decline in backlogs in September, although the rate of decline moderated to the lowest level in the period. This continued decline in order books is a bad sign for production developments in the coming months.
The service sector is increasingly putting a strain on the economy
The business situation is now changing even more significantly in the service sector. After reaching a 13-month high in March, the service sector business activity growth rate has since moderated, signaling only very modest gains in both August and February.
After reporting an increase in demand for many service-based activities such as travel, tourism and leisure at the beginning of the year, this upswing is now reversing.
Survey results show that the tailwinds from the reopening of the global economy due to COVID-19 are increasingly being offset by downward pressure on spending due to increased living costs and higher interest rates.
New business inflows into the services sector therefore fell for the second consecutive month in September, although the decline accelerated. In addition, the decline in new business in the services sector exceeded the rate of order loss in the manufacturing sector for the first time in a year, meaning that the services sector is now leading the demand brake for the economy.
Sticky CPI
Meanwhile, the survey’s sales price data continues to suggest that consumer price inflation remains hovering around the 3 percent mark. The index of average prices for goods and services was unchanged at 55.1, down from 58.3 in April, but still elevated by historical standards.
Although manufacturers’ selling prices barely increased in September, continuing to act as a significant dampener on overall inflation trends, services prices continued to rise sharply (the rate of increase trended even higher) given the increased cost growth associated with them. Wages and higher energy costs.
Worryingly, higher labor and oil prices were also largely associated with steeper manufacturing input cost inflation, albeit from low levels.
Employment is increasing for now
Finally, looking at the labor market aspect of the flash PMI, September saw employment increase, by far the fastest in four months. The increase in hiring came primarily from the service sector, although factories also continued to add staff at a modest pace.
However, there are indications that employment development could weaken again. Backlogs – a key indicator of capacity utilization – fell in September at a pace that, excluding the early months of the pandemic lockdown, was the fastest since comparable data for the manufacturing and services sectors became available for the first time in late 2009. The backlogs fell in both sectors. The decline accelerated significantly in the services sector.
The disappointing order situation played a key role in dampening companies’ growth expectations in the coming year. Future manufacturing expectations fell to a nine-month low, reflecting weakening optimism in the services economy.
A decline in jobs would mean a significant weakening of the economic situation, but the associated decline in wage bargaining power would also bring good news in the fight against inflation. We are therefore watching with interest to see how these key figures develop in the coming months.
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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
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