Note: I am travelling for another week, impacting frequency and depth.
PMIs
- S&P Globals’s Services PMI: Business activity growth eases as demand conditions soften in July
The seasonally adjusted final S&P Global US Services PMI Business Activity Index posted 52.3 at the start of the third quarter, down from 54.4 in June. The latest data signalled a modest and slower expansion in business activity at service providers. The rate of growth was the softest since February and weaker than the long-run series average. Nonetheless, greater output was attributed to a sustained increase in new orders and continued demand from existing customers.
New business at service sector firms grew for the fifth month running in July, and at a marginal pace. The expansion was linked to a larger customer base and accommodative demand conditions. That said, the pace of increase slowed notably from that seen in June and was well below the series trend rate. Firms often stated that high interest rates dragged on domestic customer spending.
New export orders rose at a sharper pace, however. New business from abroad increased for the third successive month and at a solid pace amid reports of stronger demand from foreign customers.
On the price front, input costs at service providers increased at a further marked pace during July.The rise was historically elevated and driven by higher wage bills and supplier prices. Although substantial, the rate of increase was weaker than seen in June and much slower than those seen through 2021 and 2022. Following a brief acceleration in pace during June, the rate of increase eased to the second-slowest since October 2020.
Similarly, selling prices continued to rise at a pace that was faster than the series trend in July. That said, the rate of selling price inflation accelerated from that seen in June and was marked overall. Companies often noted that higher charges stemmed from the pass-through of higher costs to customers, notably relating to wages.
Pressure from rising wages and challenges finding suitable candidates dampened employment growth during July. Service sector firms recorded a further rise in staffing numbers, but the rate of job creation was the slowest since January. Workforce numbers have increased in successive months for three years, however, with companies attributing hiring to greater new orders.
Despite a slower uptick in employment, service providers were able to manage their workloads, as backlogs fell in July. The decrease in outstanding business was only marginal but was the second decline in the last three months.
The outlook for activity over the coming year at service providers was upbeat overall in July. Planned increases in marketing spending, alongside hopes of greater client demand and stabilization in interest rates, reportedly underpinned optimism. The degree of confidence slipped sharply to the lowest since December 2022, however, amid concerns regarding future demand conditions.
- The ISM Services PMI:
In July, the Services PMI® registered 52.7 percent, 1.2 percentage points lower than June’s reading of 53.9 percent. The composite index indicated growth in July for the seventh consecutive month after a reading of 49.2 percent in December, which was the first contraction since June 2020 (45.4 percent). The Business Activity Index registered 57.1 percent, a 2.1-percentage point decrease compared to the reading of 59.2 percent in June. The New Orders Index expanded in July for the seventh consecutive month after contracting in December for the first time since May 2020; the figure of 55 percent is 0.5 percentage point lower than the June reading of 55.5 percent. (…)
The Prices Index was up 2.7 percentage points in July, to 56.8 percent. (…)
There has been a slight pullback in the rate of growth for the services sector. This is due mostly to the decrease in the rate of growth for business activity, new orders and employment, as well as ongoing faster delivery times. The majority of respondents are cautiously optimistic about business conditions and the overall economy.
WHAT RESPONDENTS ARE SAYING
- “Pricing in food sectors has come down incrementally, but in very small, almost minute percentages. IT labor pricing is still inflated.” [Accommodation & Food Services]
- “Sales have been steady.” [Construction]
- “Continuing to see improved case volume in 2023, although July and summer months have flattened a bit as usual. Still scratching and clawing to find savings with economic inflationary pressures.” [Health Care & Social Assistance]
- “Business remains steady.” [Information]
- “We are maintaining a cautious approach, although inflation seems to be easing. The overall business environment has stabilized, but tight labor markets are creating ongoing issues.” [Management of Companies & Support Services]
- “Hiring of employees, temporary workers and consultants continues to be slow as companies remain cautious about increasing fixed and variable expenses during uncertain economic times.” [Professional, Scientific & Technical Services]
- “Although capacity in transportation services has improved, there are still some industries with lagging lead times for their products.” [Public Administration]
- “Overall economy is good. Supply chain market is stable. Commodity prices are increasing but at a slower rate. Lead times and deliveries are ideal, and inventories are lower than last quarter. The unemployment rate is at its lowest point in 70 years. Wages continue to grow.” [Retail Trade]
- “We are still having issues with getting certain materials based on chips, though not nearly as imposing as they were a year ago. Lead times from Europe and in general seem to be improving. There are challenges with suppliers who made changes during the pandemic to spread workloads — they are not as responsive, and this affects lead times.” [Transportation & Warehousing]
- “Steady, slower growth.” [Finance & Insurance]
- “High operational expenses continue to put pressure on the business and limit hiring. Supplier costs (are) not coming down as much as expected. Service levels from suppliers continue to improve. Trucking metrics improved.” [Wholesale Trade]
Recent key economic news
Q2 real GDP growth came in above expectations at a +2.4% annual rate, beating the +1.8% consensus estimate and accelerating from +2.0% in Q1, weakening the recession case. Adding to the encouraging news was the sharp slowing in inflation, as the GDP price deflator eased to a +2.2% annual rate (lowest number since 2020Q2!) from +4.1% in Q1 and considerably below the +3.0% consensus forecast.
The core PCE deflator also undercut expectations at +3.8% annualized (consensus was +4.0% and the lowest reading since the first quarter of 2021) and also sliced below the +4.9% first-quarter reading.
David Rosenberg remains an economy bear, reminding us
that over the past six recessions (before the pandemic) dating back to the early 1970s, that real GDP growth on average was +2.0% at an annual rate the quarter the recession began? (…) When the Global Financial Crisis began in 2007Q4, real GDP growth came in at a +2.2% annual rate. [In] the first quarter of the 1981-82 recession, real GDP growth printed +4.3% at an annual rate. Or just as the 1973-75 recession was just getting started, real GDP was a perky +4.0% pace. These were all head fakes because GDP is a coincident indicator at best.
David added
after stripping out shelter (rent, utilities) and medical care — both of which are essentials — consumer spending barely expanded in the second quarter (+1.4% annualized). We came off the month of June with industrial production (-0.5% for the second month in a row), real retail sales (flat), housing starts (-8.0%), building permits (-3.7%), new home sales (-2.5%), existing home sales (-3.3%), exports (-0.2% and down three straight months) and real core capex shipments (-0.1%) either declining or stagnating.
Last Friday we got the income and spending data for June. This table summarizes:
- Spending rose +0.5% in nominal terms and May was also taken higher to +0.2% from +0.1% initially.
- The real or inflation-adjusted gain was +0.4% (after a +0.1% reading in May). We head into Q3 with a slowish +1.1% (annualized) momentum in real consumer spending.
- Core PCE inflation slowed to +0.17%, nicely down from +0.4% and +0.3% in the previous 2 months.
- The Powell super-core service sector price index came in at +0.2% for the second month in a row.
- Real goods consumption rose 0.9% with durables up 1.7% MoM after -0.3% in May and +0.9% in April. Still very strong.
- Real spending on services, supposed to offset the expected softening in goods (!), rose only 0.1% in June after +0.2% and +0.1% in May and April respectively. Last 3 months annualized: +1.6%
So while just about everybody now adopts the soft landing scenario, it is important to hear the few remaining naysayers, particularly those who do good in-depth analysis. Like him or not, Rosie is one of them:
We have to keep in mind that the policy lags are long and variable:
• Fed tightening cycles have generated recessions 80% of the time in the post-WWII era. In the periods when we saw a recession, the average lag from the first hike to the recession is 15 months (not 15 weeks!) and the range is from as low as 0 to 30 months. From the final hike, the lag is 6 months on average (and the range from 0 months to 18 months).
• The 20% of the time when recession was avoided, the Fed stopped short of inverting the yield curve. The average lag from the time of inversion to the start of recession is 10 months; with a wide band of a minimum of 0 months to a maximum of 18 months.
• The Conference Board’s leading economic indicator leads — that is the point. It is riding an epic 15 month losing streak. The average lag from its peak to the onset of recession is 13 months (and a historical range of 8 months to 21 months).
• The New York Fed’s modified three-yield curve recession model pegs the odds of seeing a downturn in the next twelve months at 96%. When the Fed first started hiking in March 2022, these recession odds for the year ahead were barely 1%. So why would anyone have thought we would be in recession by March 2023? The cutoff in the past for this metric was 70% — at that point, not once in history did the recession fail to ensue. That is the trigger point — you don’t have to wait for it to hit 100%. And the index here crossed above 70% for the first time last November. The average lag from the time the recession indicator touches or crosses the 70% threshold to when the recession commences is 10 months; and a range of 6 months to 17 months.
• There is the old refrain of how the stock market has called 9 of the past 15 recessions. But it is the bond market that has the terrific track record — peaks in the 10-year Treasury note yield have led recessions, on average, by 7 months (over the past six decades). The yield peaked last October, as an aside. The range is wide, mind you — from as low as 0 months (contemporaneous) to as long as 17 months.
All of these indicators LEAD and it can easily be argued that even if the recession call has proven to have been early, to suggest that it is not going to happen at all in the coming quarters flies too much in the face of the historical record, to say the least. It reminds me a lot of what the pundits were saying in the opening months of 2002 and again in late 2007 and early 2008.
Jay Powell at his presser last week:
- the Fed staff “are no longer forecasting a recession”. Interestingly, Powell never mentioned that the Fed staff was forecasting a recession in his previous pressers.
- The overall resilience of the economy, the fact that we’ve been able to achieve disinflation so far without any meaningful negative impact on the labor market, the strength of the economy, overall that’s a good thing. It’s good to see that, of course. It’s also you see consumer confidence coming up and things like that, that will support activity going forward.
- We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.
- So I guess I would put it this way. We — I’d say it this way, it’s really a question of how do you balance the two risks, the risk of doing too much or doing too little, and, you know, I would say that we’re coming to a place where there really are risks on both sides. It’s hard to say exactly whether they’re in balance or not. But as our stances become more restrictive and inflation moderates, we do increasingly face that risk.
- I mentioned that the inflation report was actually a little better than expected, but you know, we’re going to be careful about taking too much signal from a single reading. [Well, June was not a single reading. In fact, the Powell super-core service sector CPI has slowed to a +1.4% annual rate over the past three months. This was his focus data point which he did not even mention on Wednesday, focusing on the conventional core inflation.]
- And core inflation is still pretty elevated. You know, there’s reason to think it can come down now, but it’s still quite elevated. And so we think we need to stay on task. And we think we’re going to need to hold—certainly hold policy at restrictive levels for some time. And we need to be prepared to raise further if that—if we think that’s appropriate.
- “it is certainly possible that we would raise funds again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting.”
- The real federal-funds rate is now in meaningfully positive territory. If you take the nominal federal-funds rate, subtract a mainstream estimate of near-term inflation expectations, you get a real federal funds rate that is well above most estimates of the longer term neutral rate. So I would say monetary policy is restrictive, more so after today’s decision, meaning that it is putting downward pressure on economic activity and inflation. We’ll keep monetary policy restrictive until we think it’s not appropriate to do so. So that’s how I think about it.
Things are going the Fed’s way:
- We’ve seen softening through, you know, job openings coming down part of the way back to more normal levels; the quits rate, so people are not quitting as much. We’ve seen participation, people coming in. And so labor supply has improved, which has lowered the temperature in the labor market, which was quite overheated, you know, going back a year or so. So we’re seeing that kind of cooling and that’s very healthy and, you know, we hope it continues.
- As I mentioned, nominal wages have been coming down gradually, and that’s what we want to see, we expect to see more of that. That’s just more of what’s consistent over a longer period of time.
And here’s the recipe of this “data-dependent Fed” (my emphasis):
- But that’s the way I would think about it, is you’d start, you’d stop raising long before you got to 2 percent inflation, and you’d start cutting before you got to 2 percent inflation too, because we don’t see ourselves getting to 2 percent inflation until—you know, all the way back to 2, until 2025 or so.
- So the idea that we would keep hiking until inflation gets to 2 percent, it would be a prescription of going way past the target. That’s clearly not the appropriate way to think about it. So—and, in fact, if you look at our forecasts, we—the median participant—and again, these are forecasting out years, so taken with a grain of salt. But people are cutting rates next year because, you know, the Federal-Funds rate is at a restrictive level now. So if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore, we can you know, we can move back to a neutral level and then below a neutral level at a certain.
BTW, NYT (Big Consumer Companies Keep Raising Prices, Complicating Fed’s Job)
