Markit’s flash PMIs provide the first peek on July trends. The U.S. economy is now the sole growth engine and new orders remain buoyant, unlike Europe and Japan. However, U.S. exports are now declining as well, a worrisome global trend along with widespread costs increases.
The seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index posted 55.9 in July, down slightly from 56.2 in June and the lowest reading for three months. Nonetheless, the headline index remained well above the 50.0 no-change threshold and signalled another robust expansion of overall private sector output.
New business growth accelerated slightly in July, with survey respondents noting that improving domestic economic conditions had helped to boost client spending.
Employment growth remained solid in July, but the rate of job creation was the least marked seen since the start of 2018. A number of private sector companies noted that tight labour market conditions and a lack of suitably skilled candidates to fill vacancies had held back their staff hiring plans. Meanwhile, optimism about the year ahead business outlook improved since June and remained stronger than the trend seen in 2017.
Robust input cost inflation persisted across the private sector in July, which was attributed to increased fuel bills, higher staff salaries and rising raw material prices (especially for metals). The overall rate of input cost inflation was one of the fastest seen over the past five years.
In response to higher business expenses, private sector firms recorded a sharp and accelerated rise in their average prices charged. The overall rate of output price inflation was the fastest since this index began almost nine years ago.
The seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index eased to 56.2 in July, from 56.5 in June. The latest reading signalled a robust rise in service sector output, but the rate of expansion was the slowest since April.
There were signs of reduced pressure on operating capacity in July, despite another sharp rise in new business intakes. This was highlighted by a fall in backlogs of work for the first time since April 2017.
Business optimism regarding the year ahead outlook improved slightly in July. However, there were signs of greater caution in terms of staff hiring, with the latest upturn in employment numbers the weakest since January.
Meanwhile, input cost inflation remained close to the four-and-a-half year peak seen in May. Higher fuel prices were frequently cited by survey respondents. Service providers sought to pass on a proportion of their increased costs to clients in July, with the rate of prices charged inflation the fastest since the survey began in October 2009.
At 55.5 in July, the seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ was little-changed since June (55.4) and well above the average since this index began in May 2007 (52.6). A relatively strong improvement in manufacturing business conditions reflected robust new order growth, alongside a solid upturn in both production volumes and employment numbers.
The overall improvement in manufacturing performance was underpinned by solid growth in domestic demand, which helped to offset another slight fall in export sales. Although only marginal, the latest drop in new work from abroad was the greatest seen since May 2016.
Inventory building continued in July, with some manufacturers seeking to boost their stocks of raw materials in response to stretched supply chains. The latest lengthening of vendor lead-times was the greatest seen in more than 11 years of data collection. Survey respondents widely commented on low stocks among suppliers and capacity constraints across the freight industry.
On the inflation front, latest data revealed another sharp rise in average cost burdens, which manufacturers overwhelmingly attributed to higher raw material prices. There were widespread reports that tariffs on steel and aluminium had pushed up input costs in July. Robust client demand and efforts to protect margins resulted in the strongest rate of factory gate price inflation since May 2011.
Despite concerns about higher input costs and tight labour market conditions, manufacturing companies remained upbeat about the year-ahead business outlook. The degree of positive sentiment picked up since June and remained comfortably above that seen on average in 2017, which partly reflected optimism regarding the outlook for domestic economic conditions.
Overall, although down from June, the July flash PMI is in line with the average for the second quarter and indicative of the economy growing at an annualised rate of approximately 3%.
The IHS Markit Eurozone Composite PMI fell to 54.3 from 54.9 in June, according to the July flash reading (which is based on approximately 85% of usual replies). The latest reading was the second weakest since November 2016, only narrowly beating May’s recent low.
Manufacturing output grew at a rate unchanged on June’s 19-month low, while business activity growth in the service sector pulled back from June’s four month high, registering the second-slowest expansion seen in the past year-and-a-half.
A deterioration in growth of new orders suggests that the rate of expansion could slow again in August. Measured across both sectors, July saw the smallest increase in new orders since October 2016.
Factory order book inflows were the lowest for nearly two years while service sector new business gains were the second-lowest for a year-and-a-half. For factories, the slowdown in order book growth was partly due to weakened export gains, with new export orders registering the smallest monthly rise since August 2016, the rate of increase having slowed sharply since the buoyant pace recorded earlier in the year.
The reduced inflow of new orders meant companies saw backlogs of uncompleted work grow at a slower pace. The July survey recorded the smallest accumulation of outstanding work since September 2016. Slower growth of backlogs often leads to a reduction in hiring, and employment growth moderated commensurately in July. The overall rate of job creation nonetheless remained strong by the standards of the survey over the past 20 years, running only marginally below that seen in the first half of the year to suggest that firms generally remained firmly in hiring mode.
However, in a further sign that growth of output and hiring may continue to slow, future expectations of business activity slipped to a 20-month low.
Optimism regained some poise in manufacturing, having slumped to a 31-month low in June, but slid to the lowest since November 2016 in the service sector. Growth of input buying in manufacturing also slowed to a 22-month low as firms scaled back production plans.
Price pressures meanwhile eased, though remained elevated. The flash PMI survey gauges of input cost inflation cooled slightly in both manufacturing and services, but the headline index fell only modestly from June, recording its third highest level in seven years.
Companies continued to report widespread price hikes for fuel and other oil-related inputs, alongside cost increases for metals such as steel and, in some countries, rising wage pressures. Price hikes for raw materials were also again often linked to tariffs, trade wars, supply chain delays and shortages, with supplier delivery times widely reported to have lengthened again, notably from China.
Average selling prices for goods and services rose again as companies often sought to pass higher costs on to customers. The latest rise in prices was weaker than the four-month high seen in June but nevertheless still one of the highest seen over the past seven years. Goods price inflation continued to run higher than for services, yet the latter was notable in being one of the steepest seen over the past decade.
By country, faster growth in Germany contrasted with a slight slowing in France. Elsewhere, growth was the weakest for 21 months, slipping lower in both manufacturing and services. The rate of growth of Germany’s private sector economy rebounded from a 20-month low in May to a five-month high, driven by a stronger increase in manufacturing output. But France saw the second weakest expansion in 18 months, stymied in particular by near-stagnant manufacturing.
The July reading is consistent with quarterly GDP growth of 0.4%, down from a 0.5% expansion indicated by the surveys for the second quarter.
- Japan Flash Manufacturing PMI falls to 20-month of 51.6 in July, from 53.0 in June.
- Input and output price inflation both accelerate to multi-year highs.
- Business confidence dips noticeably.
Flash survey data pointed to a slowing of growth momentum for Japan’s manufacturing sector at the beginning of the third quarter, following a robust performance so far this year.
New business grew at a much weaker rate and was broadly flat, while export demand, despite further yen depreciation, deteriorated for a second month running.
Slowing demand presents a worrying development given input delivery times lengthened to the sharpest extent in over seven years. Supply chain difficulties reportedly contributed to the fastest rate of input price inflation in since March 2011. Although output prices were raised at a relatively notable pace, the rate of increase was far weaker than that of costs, implying profit margin erosion.
(…) “Trade frictions have clearly become a major cause of concern, especially among manufacturers,” [Markit’s] Williamson said. “Firms have become increasingly worried about the impact of tariff and trade wars on demand, prices and supply chains.
Also getting real is rising inflation in the U.S.:
- Here is the Markit PMI Output Prices Index:
Source: @WilliamsonChris, @IHSMarkit (via The daily Shot)
Charles Schwab’s Liz Ann Sonders has this chart of the NY Fed’s UIG which also strongly suggest accelerating inflation:
Chinese Pull Back on U.S. Real Estate Buying Spree That Had Helped Prices Chinese investors become net sellers of U.S. commercial property for the first time in a decade
(…) Now, the Chinese government has changed course again, cracking down on certain types of outbound investment that include real estate in part to help stabilize the currency. Chinese companies like HNA Group and Greenland Holding Group are unloading prize properties to repay debt and to comply with regulatory and market pressures from home, analysts said. (…)
The retreat by Chinese investors could slow growth further in the U.S. commercial real-estate market. Property values have plateaued on average in the last 18 months after rising sharply in the early years of the post-2008 financial crisis recovery.
While Chinese buyers never represented more than a fraction of the buying power in any U.S. market, these companies often made headlines with the steep prices they were willing to pay, which helped push values higher in certain segments of the market. (…)
Trump Administration Plans Up to $12 Billion in Farm Aid to Ease Concerns Over Trade Disputes Announcement of emergency aid to farmers follows retaliatory steps by U.S. trading partners
Agriculture Secretary Sonny Perdue said the U.S. government would provide incremental payments to support prices of some of the hardest-hit commodities, including soybeans, sorghum, cotton, corn, wheat and pork. (…)
Even GOP senators who usually defend Mr. Trump expressed worry that aid might have to be extended to other sectors if he continues his trade fights on various fronts. (…)
Mr. Trump, addressing a gathering of veterans groups on Tuesday, urged patience on trade, despite concerns raised by critics: “Just stick with us,” he said. “It’s all working out.” (…)
U.S. Increasingly Large Driver of Global Trade Deficits, IMF Reports Fiscal policy will widen deficits in coming years, says annual assessment of global imbalances
(…) while the administration has communicated that it wants to reduce trade deficits, it has been increasing budget deficits. The Trump administration said last week that it expects annual budget deficits to grow nearly $100 billion more than previously forecast for each of the next three years, pushing the government’s budget deficit beyond $1 trillion starting next year. Such a quick swing to additional deficit spending is expected to increase U.S. reliance on imports, also leading to a widening of the current-account deficit. (…)
With China largely having tackled its surplus, the focus of that pressure shifts to the European Union (especially Germany) as well as Japan. The countries run the two largest surpluses now, with Germany’s surplus at about $296 billion and Japan’s at $196 billion.
EARNINGS WATCH
110 reports in, 83% beat rate and an amazing +5.9% surprise factor! Revenues for these 110 companies are up 10.1%, beating by +1.5% led by Consumer Discretionary (+2.1%) and Industrials (+1.9%).
- One has to wonder how such high revenue growth rates can be sustained given low inflation, a rising dollar, weak exports.
- One also has to wonder how long such strong earnings can be sustained given widespread reports of rising costs and trade issues.
In spite of the above, corporate guidance must be pretty good: analysts remain optimistic for 2018 (+22.5%) and 2019 (+10.1% vs +9.7% on July 1).
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GM Posts Higher Profit, Lowers Outlook Amid Steel, Aluminum Costs General Motors’s second-quarter net income rose amid strong results from its in-house finance arm and China, but the auto maker lowered its 2018 profit outlook in the wake of U.S. tariffs on steel and aluminum.
(…) GM said commodity costs in the quarter were about $300 million higher than a year earlier.
The nation’s largest car company by sales said it expects raw-materials costs to rise well beyond what it expected when it set its profit guidance at the beginning of the year. A combination of higher commodity prices—primarily steel and aluminum—and unfavorable foreign-exchange rates in South America will result in a hit of about $1 billion more than what the company originally forecast.
GM reduced its 2018 earnings-per-share forecast to $6, from a range of $6.30-$6.60. Analysts had forecast EPS of $6.41. (…)
Assuming approximately the same savings from a lower U.S. corporate-tax rate each quarter, the duties could eat up anywhere from about a third to well more than half of the tax benefits in 2018. The impact would be even worse should the U.S. follow through with a 25 percent levy on imported cars and trucks.
Daimler’s workers to defend jobs if tariffs force production shift Daimler’s German workforce will seek to defend local jobs if the luxury carmaker attempts to shift some production to the United States in response to trade tariffs, supervisory board member Roman Zitzelsberger told Reuters.
TECHNICALS WATCH
- Lowry’s Research says yesterday’s action was disappointing with slow demand and negative breadth. “The continued selectivity and overbought readings warrant caution.”
- Chaikin says that small caps are overbought and its money flow indicator has turned neutral.
