PMI SERVICES
USA: Decline in business activity gains pace in December, as demand conditions worsen
US service providers signalled a sharp fall in business activity at the end of the year, according to the latest PMI™ data. Output levels declined further amid weak demand conditions and another monthly drop in new orders. Domestic and foreign client demand contracted as economic uncertainty and high interest rates led to reduced customer spending.
Subdued demand resulted in muted business expectations for output over the year ahead, as concerns regarding inflation and the future order pipeline dampened confidence. Although employment continued to rise, the pace of job creation was only marginal overall as cost saving initiatives and lay-offs weighed on hiring.
Meanwhile, rates of input price and output charge inflation eased to the slowest paces since October 2020. Reductions in costs for some inputs were passed through to customers in an effort to remain competitive and drive sales higher.
The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 44.7 at the end of the year, down from 46.2 in November, but up slightly from the earlier released ‘flash’ estimate of 44.4.The rate of decline in output accelerated for the third month running and was the second-fastest since May 2020. Lower business activity was commonly attributed to a further reduction in new orders, as client demand weakened due to the impact of higher interest rates and inflation on customer spending.
Service sector firms continued to record a contraction in new business in December. Lower purchasing power among clients reportedly drove the latest downturn in new orders. The decline in customer demand was strong overall and the steepest in over two-and-a-half years.
At the same time, new export orders fell further in December, albeit at the slowest pace for three months. Anecdotal evidence suggested that global economic uncertainty and high inflation in key export markets hampered new export sales.
On the price front, cost pressures softened notably at the end of 2022. Service providers stated that although supplier and wage bills rose sharply, this was partly offset by reductions in some key input prices.The rate of cost inflation moderated to the slowest since October 2020 and was only slightly quicker than the series average.
Firms sought to pass through cost savings, where applicable, in an effort to drive sales higher and remain competitive in December. The pace of increase in output charges eased for the eighth month running. Selling prices at service sector firms rose at the slowest rate in over two years.
In line with lower new order inflows, service providers moderated their hiring activity during December. The rate of job creation was only marginal overall and the second-slowest since September 2021. Although some companies reportedly hired skilled and temporary staff, others mentioned that redundancies and the non-replacement of voluntary leavers dampened employment growth.
Backlogs of work declined for the third month running, as lower new order volumes allowed firms to work through incomplete business.
Finally, service sector firms registered optimistic expectations regarding the year ahead. That said, the degree of confidence was below the series average amid concerns surrounding inflation, high interest rates and future demand conditions.
Siân Jones, Senior Economist at S&P Global Market Intelligence, said:
“US private sector firms brought 2022 to a close signalling marked obstacles to overcome with relation to the health of the economy. Contractions in output and new business were broad-based and gathered pace in December as customer unease led to dwindling demand and order postponements.
“Despite weak demand conditions, firms continued to hire staff. Nonetheless, the pace of job creation was only slight as some firms turned their focus to filling temporary worker and long-held skilled jobs vacancies, whilst others reported instances of employees being laid off.
“A notable development through the month was a stark easing in inflationary pressures across the private sector. Muted demand for inputs led to the least marked uptick in costs for over two years, while companies also saw a slower increase in selling prices in a bid to entice customers and boost sales. The pass through of cost savings in the form of customer discounts will likely signal further adjustments to inflation as we enter 2023.”
Eurozone downturn eases in December as price pressures cool
The S&P Global Eurozone Services PMI Business Activity Index rose to 49.8 in December. This was up from 48.5 in November and signalled only a marginal decline in service sector output across the euro area. Overall, this was the softest decrease in activity since last August.
A sixth successive monthly reduction in new business was registered in December. Falling export orders also contributed to this. That said, the overall rate of decrease in new workloads was the softest in five months.
Outstanding business volumes fell for a second successive month as reduced new business enabled companies to focus on orders pending completion. A further expansion in employment also boosted resource availability. The rate of job creation was only fractionally stronger than the 20-month low seen previously, however.
Input prices and output charges both rose markedly in December, although rates of inflation eased to 11- and four-month lows respectively.
Finally, business confidence edged up to a four-month peak but remained historically subdued.
Commenting on the final Eurozone Composite PMI data, Joe Hayes, Senior Economist at S&P Global Market Intelligence said:
“The eurozone economy continued to deteriorate in December, but the strength of the downturn moderated for a second successive month, tentatively pointing to a contraction in the economy that may be milder than was initially anticipated. Weaker declines were also seen broadly across the euro area nations, and most notably in Germany, whose economy has been the primary drag on the eurozone as a whole in the second half of this year.
“Cooling price pressures have helped temper the decline in economic activity levels. A particularly marked slowdown in manufacturing inflation bodes well for other sectors of the economy, although this has partly been down to relatively benign developments across European energy markets at the end of 2022. Services inflation remains stickier for now, reflecting a sharp rise in labour costs, which continued to be pushed up by continued hiring efforts.
“Nevertheless, there is little evidence across the survey results to suggest the eurozone economy may return to meaningful and stable growth any time soon. Demand conditions remained fragile as clients have retrenched, while business confidence remains bogged down by recession concerns, energy cost uncertainty and persistently high inflation and a tightening of financial conditions.”
CHINA: Pressure on service sector activity eases in December
Latest PMI data signalled a further fall in business activity across China’s service sector at the end of 2022, as ongoing efforts to curb the spread of COVID-19 continued to disrupt operations and dampen demand. That said, both activity and new work fell at softer rates than in November. The level of outstanding business meanwhile expanded at the quickest pace since May, and firms registered a softer fall in employment. Inflationary pressures moderated further, with both input costs and prices charged rising at mild rates.
When assessing the 12-month outlook for business activity, firms expressed stronger optimism in December. Moreover, the level of positive sentiment improved to its highest for nearly a year-and-a-half as firms projected a strong recovery from the pandemic.
The seasonally adjusted headline Business Activity Index rose from a six-month low of 46.7 in November to 48.0 in December. While the sub 50.0 index reading indicated a fall in Chinese service sector activity for the fourth straight month, the rate of decline was only modest overall. Lower output was often linked to the impact of COVID-19 containment measures on operations, including temporary business closures, and customer demand. However, some companies indicated a relative improvement in conditions compared to November.
Overall new work also decreased for the fourth month running, albeit at a slower pace than in November. Restrictions around travel and the subsequent reduction in client numbers was mentioned by a number of firms. The pandemic also weighed on external demand, with new export business declining for the second time in three months. Outstanding business meanwhile rose for the fifth month in a row, with some firms stating that they had been unable to work through backlogs due to COVID-19 restrictions. Though modest, the rate of accumulation was the quickest seen since May.
A combination of cost-reduction policies and voluntary leavers drovea further decline in service sector employment in December. Despite easing from November’s record pace and being modest, the rate of job shedding was quicker than seen on average in 2022.
Relatively subdued demand conditions led to a further easing of price pressures at the end of the fourth quarter. The rate of input cost inflation moderated to a six-month low, with expenses rising marginally overall. Greater cost burdens were often attributed to higher staff, raw material and fuel costs. At the same time, companies raised their own charges only slightly and at the softest pace since August. There were reports that efforts to remain competitive had restricted firms’ abilities to hike their fees in December.
Service providers were generally confident that business activity will be higher than current levels in 12 months’ time. Moreover, the degree of optimism was the highest seen since July 2021. Companies that foresee higher output frequently mentioned that they expect the pandemic situation to improve, restrictions to ease, and operations and demand to recover.
What if Inflation Suddenly Dropped and No One Noticed? The high year-over-year rate masks progress in the past five months. But we’re not out of the woods.
By Alan S. Blinder (professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve, 1994-96)
Maybe we should start the new year with some good news: Inflation has fallen dramatically.
No, that’s not a prediction; it’s a fact. With one month remaining in 2022 (in terms of available data), inflation in the second half of the year has run vastly lower than in the first half. In fact—and this is astonishing—it’s almost back down to the Federal Reserve’s 2% target. Even more astonishing, hardly anyone seems to have noticed.
Yes, there’s a catch or two or three, to which I’ll come back. But first the good news:
Over the past five months (June to November 2022), inflation has slowed to a crawl. Whether measured by the consumer-price index, or CPI, which most people watch, or the price index for personal consumption expenditures, or PCE, which the Federal Reserve prefers, the annualized inflation rate has been around 2.5% over these five months.
Yes, you read that right. Yet hardly anyone has noticed this stunning development because of the near-universal concentration on price changes measured over 12-month periods, which are still 7.1% for CPI inflation and 5.5% for PCE inflation. (…)
But when the inflation rate changes abruptly, 12-month averages can leave you watching recent history rather than current events. Today is one of those times.
As mentioned, the CPI inflation rate over the past 12 months has been an alarming 7.1%. But the U.S. economy got there by averaging an appalling 10.6% annualized inflation rate over the first seven months and a mere 2.5% over the last five. The PCE price index tells a similar story, though a somewhat less dramatic one. The 5.5% inflation rate over the past 12 months came from a 7.8% rate over the first seven months followed by a 2.4% rate over the last five. (…)
So is today’s true inflation rate a mere 2.5%, meaning that Jerome Powell and the Federal Reserve can relax? Not quite. Now for the catches I promised earlier.
First, we’ve had this wonderfully low inflation rate for only five months. That’s longer than one or two months, which is why I’m writing this article. But it’s still too short a time to declare victory.
Second, if you concentrate instead on “core” inflation, which excludes food and energy prices, annual inflation over the past five months has run higher: a 4.7% annual rate for the CPI and 3.7% for the PCE. So the Fed’s fight against inflation isn’t over.
That headline inflation has dropped more than core inflation tells you that lower food or energy inflation played a meaningful role. In this case, it was energy. As measured in the CPI, energy prices have dropped 11% over the past five months, whereas they rose 27% over the previous seven. And perhaps this constitutes a third catch. With the war in Ukraine still raging and Iran in turmoil, maybe we can’t count on gasoline remaining at $3 a gallon.
Was the rest of the stunning drop in inflation in 2022 due to the Fed’s interest-rate policy? Driving inflation down was certainly the central bank’s intent. But it defies credulity to think that interest-rate hikes that started only in March could have cut inflation appreciably by July. There is an argument that monetary policy works faster now than it used to—but not that fast.
What did change dramatically was the supply bottlenecks. Major contributors to inflation in 2021 and the first half of 2022, they are now mostly behind us.
Peering ahead, the bottlenecks almost certainly won’t return. Another energy shock can’t be ruled out but looks unlikely. And the anti-inflationary effects of the Fed’s monetary policy are yet to come.
Altogether, the inflation future does indeed look brighter than the inflation past. Happy New Year.
Mr. Blinder is obviously not one of my readers. I started to “take the under” on the inflation bet several months ago, documenting the details suggesting slower inflation ahead. Mr. Blinder is right, we’re not out of the woods yet, but the forest is looking less frightening than one year ago.
But he also focuses too much on the recent benefits of supply debottlenecking. Goods inflation is not what would sustain high or low inflation going forward. Services prices are to be closely watched.
On December 27, I wrote:
November is the first month when the Fed’s drive to slow consumption and cool inflation shows convincing results. Real expenditures were flat in total and down 0.6% on goods (-1.5% on durables) while real services rose a steady, moderate 0.3%.
Core PCE inflation (blue bars) slowed from +0.55% in August, +0.46% in September, +0.26% in October to +0.17% in November.
Even PCE-Services prices (red) are behaving well.
Mr. Powell’s goal to see inflation slow over 12, 9, 6 and 3 months is currently met. Here’s the sequence: 4.6%, 4.3%, 4.3%, 3.6% respectively.
We’re not at 2% yet, but with the last 2 months at +2.6% a.r., the odds are very good that the sequence will be even lower by the time the FOMC meets next on Feb. 1.
Note also that core services ex-shelter prices, the largest component of core PCE price inflation, were down MoM in October and unchanged in November; last 4 months +3.2% annualized.
But wage trends remain problematic, beyond the short-term relief from goods deflation and lower energy prices:
Vehicles Sales Declined to 13.31 million SAAR in December
Wards Auto estimates sales of 13.31 million SAAR in December 2022 (Seasonally Adjusted Annual Rate), down 5.9% from the November sales rate, and up 4.7% from December 2021.
BTW from BofA: “In the 2022 holiday shopping season, total card spending per HH grew 1.2% y/y”
Euro-Zone Inflation’s Sharp Drop Masks Underlying Pressures
December’s reading came in at 9.2%, Eurostat said Friday, with slower growth in energy costs the only reason for the moderation. The figure reflects slowdowns in Germany, France, Italy and Spain and was less than the 9.5% that economists polled by Bloomberg had expected.
Highlighting how inflation continues to menace Europe’s economy, however, a measure of underlying price pressures that strips out energy and food edged up to a record 5.2%. (…)
A second month of cooling price gains in the euro zone, which expanded to 20 countries from 19 this month as Croatia joined, came after Germany’s government paid some households’ natural gas bills to cushion the surge in costs since Russia invaded Ukraine.
Indeed, the drop in German consumer prices was almost solely responsible for the 0.3% monthly decline in the euro area, according to Bloomberg calculations. (…)
- The breakdown by main expenditure categories showed services inflation rose 0.2pp to 4.4%yoy, and non-energy industrial goods inflation rose three-tenths of a percentage point to 6.4%yoy. Of the non-core components, energy inflation fell 9.2pp to 25.7%yoy, while food, alcohol and tobacco inflation rose two-tenths of a percentage point to 13.8% yoy. (GS)
Toronto Housing Market Slumps to Record Annual Price Drop
(…) Higher mortgage costs have already forced many potential buyers to the sidelines in Toronto, causing the number of sales to fall 48.2% in December from the same period last year when the market was approaching its peak. New listings have also fallen, but at a slower rate, the real estate board said.
The benchmark price of a home in Toronto fell 0.8% in December from the month before to C$1.08 million ($797,000), not adjusted for seasonality, according to the city’s real estate board. That brought the one-year price decline to 8.9%, the biggest drop for a calendar year since the benchmark was first compiled in 2005, the data show. Prices are down 19% since March.
Still, with Canada’s population growing at its fastest pace in decades thanks to high levels of immigration, many observers expect the housing market to stabilize. Some of the data from Toronto suggest that process may have already begun. The average selling price — which is considered more volatile and less reliable than the benchmark price — was flat in December compared with November, on a seasonally-adjusted basis.
Sales in December were similar to October and November on a seasonally-adjusted basis. (…)
Even with its declines over the past nine months, Toronto’s benchmark home price is still nearly 37% higher than three years ago.
The country added just over 437,000 new permanent residents in 2022, according to Immigration, Refugees and Citizenship Canada (IRCC). This topped the department’s target for the year, as well as the previous high of 405,000, reached in 2021.
Immigration now accounts for three-quarters of Canada’s population growth. The federal government’s immigration plan calls for the admission of 1.45 million more new permanent residents over the next three years, which is equivalent to 3.8 per cent of the country’s population.
The majority of the permanent residency spots have been set aside for economic immigrants, a term for newcomers who either have money to invest, or specific desirable skills, or can demonstrate that they are capable of opening businesses.
The federal government has said immigration is crucial for the economy, and that it accounts for as much as 90 per cent of labour force growth in Canada. (…)
“There is little debate that strong population growth goes hand-in-hand with strong real home price gains over time,” said Douglas Porter, Bank of Montreal’s chief economist.
Mr. Porter analyzed the relationship between population growth and home prices in 18 developed countries. He found that countries with the fastest population growth during the decade leading up to 2020 – such as New Zealand and Canada – had greater home price inflation than those where populations remained stable or decreased. (…)
Where Mr. Porter does expect the surge in newcomers to make a difference is in the rental market, where borrowing costs are less of a factor. Rents have already risen sharply over the past year, and he expects increased competition will push prices higher still. (…)
German Postal Workers Seek 15% Wage Increase as Negotiations Kick Off
(…) The wage demand is more than the 10.5% increase the Verdi union sought for 5 million public-sector workers in October. (…)
Carmaker Volkswagen AG and the IG Metall union reached an agreement in November to increase pay in two stages — 5.2% from June 2023 and 3.3% from May 2024. Energy provider RWE AG agreed to raise the base salary of its 18,000 employees by a minimum 6% as well as granting two one-off payments of €1,500 each the same month. (…)
China May Ease ‘Three Red Lines’ Property Rules in Big Shift
Beijing may allow some property firms to add more leverage by easing borrowing caps, and push back the grace period for meeting debt targets set by the policy, according to people familiar with the matter. The deadline could be extended by at least six months from the original June 30 date, the people said. (…)
The so-called “three red lines” metrics, that emerged in 2020, were the hallmark of a massive property crackdown by Beijing as it sought to reduce developers’ leverage, lower risk in the financial sector and make homes more affordable as part of President Xi Jinping’s common prosperity push.
The measures, which imposed strict debt and cash-flow targets on real estate firms, choked off liquidity for the highest-leveraged developers, contributing to the avalanche of defaults and construction halts that sparked mortgage boycotts and plunging sales across the nation.
With access to credit markets largely closed, developers have defaulted on more than 140 bonds in 2022, according to data compiled by Bloomberg. Overall, developers missed payments on a combined $50 billion in domestic and global debt based on issuance amount. (…)
Fears of further contagion meantime weakened consumer confidence and roiled global investors who had long assumed the government would bail out the real estate titans. The crisis spooked buyers, driving home sales down by the most in at least two decades, while home prices declined for 15 straight months.
After almost two years of housing market pain, Beijing is changing its stance. Under the new proposal, China will ease restrictions on debt growth for developers depending on how many red lines they meet, the people said, asking not to be identified discussing a private matter.
Companies that meet all three thresholds will no longer have borrowing caps and can use letter of guarantees from banks to pay land purchase deposits, the people added. (…)
More than 30 companies were able to meet all three lines as of June last year, including China Vanke Co. and Longfor Group Holdings Ltd., based on Bloomberg calculations. (…)
Beijing is obviously desperate, after having made blunders over blunders. It will now instruct its own banks to bail the sector out, piling more debt on sick companies.
EQUITIES
- Samsung Expects 69% Drop in Profit on Slumping Tech Demand High inflation and weak economies hit sales of memory chips and smartphones.
- Tesla Now Over 40% Cheaper in China Than US as Prices Cut Again The carmaker’s shares are poised to extend their slump after it made another round of price cuts in China.
- Shell expects to pay $2.4 billion in new windfall taxes in the EU and U.K. (FT)
- Heavy retail selling continued. JPM writes that this was the “the third worst week of net selling in history.” Bearish sentiment and tax loss selling are strong factors. (The Market Ear)
China-Developed mRNA Covid Vaccine Starts Test Production Chinese drugmaker CanSino Biologics started trial production of a vaccine using mRNA Technology to target new variants of Covid-19 that are behind the country’s current outbreak.
(…) The Tianjin-based biotech firm plans to produce 100 million doses of the vaccine, designed to combat Omicron during the first phase of manufacturing, according to a company release posted to its social-media account late on Thursday.
The vaccine is now undergoing clinical trials that have shown positive results in terms of safety and ability to provoke an immune response, the release said.
CS-2034, as CanSino’s shot is now called, is based on the same gene-based messenger RNA technology found in Pfizer Inc. and Moderna Inc.’s vaccines. The breakthrough comes after almost three years of fighting the pandemic, during which Beijing has relied largely on homegrown vaccines that have grown less effective than mRNA shots in combating new strains of the virus. (…)
The CanSino vaccine targeting the BA.5 strain of the Omicron variant produced neutralizing antibody levels 29 times higher than a previous version, when used as a booster for people [who] had received three doses of inactivated vaccines, CanSino said. It added that the Chinese mRNA vaccine also provides a better and safer immune response in people aged 60 or above than other mRNA vaccines. (…)
In September, Indonesia approved another Chinese-made mRNA vaccine for emergency use, becoming the world’s first to give a green light to a Chinese vaccine using the technology. The vaccine, known as AWcorna, was co-developed by Chinese drugmakers Suzhou Abogen Biosciences Co. and Walvax Biotechnology Co., as well as a research institute run by China’s military.
China has rebuffed repeated US offers to share advanced vaccines as Beijing battles a fast-spreading wave of Covid-19, a rejection that’s led to growing frustration among American officials concerned about a resurgence of the pandemic.
Worried about the rise of new variants and impact on China’s economy, the US has repeatedly offered mRNA vaccines and other assistance to President Xi Jinping’s government through private channels, according to US officials who asked not to be identified discussing the deliberations.
US officials have also proposed indirect ways to supply the vaccines in an effort to accommodate political sensitivities in China on accepting foreign aid, they said, without providing more details. (…)
Only about two-thirds of people over age 80 have gotten fully vaccinated as of November, the last time [“official”] data was released.
Moreover, accepting vaccines from the US is likely a nonstarter politically for Xi, as it would shine a spotlight on Beijing’s failure to develop its own mRNA vaccine at a time when China is pushing for self-reliance amid a broader strategic fight with the US. China historically has been reticent to accept outside assistance during crises. (…)
The two sides continue to speak through health channels, another person said, adding that China’s response to the repeated US offers has been firm. Every time, Chinese officials have told their US interlocutors that Beijing has the situation under control and doesn’t require assistance, according to the people. (…)
Liu [Pengyu, a spokesman for the Chinese embassy in Washington] cited a University of Hong Kong study that suggested three doses of Sinovac Biotech Ltd.’s CoronaVac were 97% effective against severe illness or death, roughly in line with three doses of an mRNA vaccine. He added that China has administered 3.4 billion shots domestically and has an annual production capacity of 7 billion doses, making China a player in vaccine exports.
“China can not only meet domestic demand but also supply to other countries in need,” he told reporters. “We are also working to upgrade the vaccines to make them more effective and bolster vaccinations to cope with possible new variants so that we will continue to play a constructive role in the global Covid fight.” (…)
