S&P Global’s September PMI survey showed a “renewed rise in
client demand” and “new orders returned to growth”. The October flash PMI reverses all that and then some:
Private sector firms in the US recorded a further downturn in output at the start of the fourth quarter, according to latest ‘flash’ PMI™ data from S&P Global. The fall in business activity was solid and stronger than that seen in September, as service providers signalled a quicker decline. Manufacturers, on the other hand, saw output rise for the second month running, albeit only marginally.
The headline Flash US PMI Composite Output Index registered 47.3 in October, down from 49.5 in September. With the exception of the initial pandemic period, the rate of decrease was the second-fastest since 2009.
New orders returned to contraction territory in October. The decrease in new business was only marginal, but was broad based as manufacturers and service providers alike recorded weaker client demand. Goods producers drove the decline, with companies highlighting the impact of inflation and stockbuilding earlier in the year on customer demand, as clients utilised current holdings of inputs and semi-finished items. A reduction in foreign customer demand was also indicated as a strong dollar and challenging economic conditions in key export markets reportedly weighed on new export orders. New business from abroad fell sharply and at the quickest pace since May 2020.
| On the price front, input cost inflation picked up at the start of the fourth quarter, following a four-month period of softer price rises. The increase in cost burdens remained historically elevated, despite being the second-slowest since January 2021. Interest rates, material shortages and greater wage bills were linked to the uptick. |
In an effort to drive new sales and remain competitive, firms reportedly offered concessions to customers following the decrease in some costs such as transportation. The rate of output charge inflation eased to the softest since December 2020, but was still quicker than the long-run series average.
In line with weaker client demand, private sector firms scaled back their hiring activity, leaving employment broadly unchanged on the month. The seasonally adjusted Employment Index posted below the 50.0 neutral mark for the first time since June 2020, largely driven by a fall in service sector staffing numbers. Meanwhile, manufacturers registered a slower pace of job creation.
A reduction in pressure on capacity was reflected in a fall in backlogs of work across the private sector. The service sector indicated a renewed fall in the level of outstanding business. Manufacturers, meanwhile, saw work-in-hand contract for the first time in over two years. Lower new order inflows allowed firms to begin working through incomplete business.
Firms’ optimism about the outlook meanwhile deteriorated markedly in October. The resulting degree of confidence was among the lowest in the survey history and the weakest for just over two years. Although hopeful of a boost to customer demand after inflation peaks, companies remain concerned regarding price pressures and the cost of living, as well as the worsening broader economic outlook amid interest rate hikes and weak customer sentiment
The S&P Global Flash US Services Business Activity Index posted at 46.6 in October, down from 49.3 in September, to indicate a solid decline in service sector output. The latest data signalled an acceleration in the decline in business activity to the second-fastest fall in almost two-and-a-half years. Firms linked the decrease to weak client demand and the impact of inflation and higher interest rates.
At the same time, new business fell for the second time in the last three months, albeit only marginally overall. Weighing on total new sales was a drop in foreign client demand. New export orders declined at a solid pace due to inflationary pressure in key export markets.
The rate of input price inflation at service providers quickened in October. Although the second-slowest since the start of 2021, the latest uptick reversed the recent trend of easing price pressures. Companies partially passed on higher cost burdens to their customers, as the pace of charge inflation picked up slightly.
A return to decline in the level of outstanding business led to service sector firms reducing their workforce numbers during October. Companies noted the non-replacement of voluntary leavers, alongside some reports of lay-offs. The decrease in employment was the first since June 2020.
Meanwhile, service sector business confidence fell to the weakest level since September 2020, as higher operating costs and client hesitancy weighed on optimism.
The S&P Global Flash US Manufacturing PMI registered 49.9 at the start of the final quarter of 2022, down from 52.0 in September. The latest data signalled broadly unchanged operating conditions on the month.
Output across the manufacturing sector increased for the second month running in October, as firms noted easing supply chain pressures and the delivery of some key inputs. The rise in production was slight, but the quickest for five months. Vendor performance continued to deteriorate, but to the smallest extent since July 2020 as firms noted less marked extensions to input delivery times.
At the same time, new orders fell back into contraction territory following a marginal expansion in September. The decrease in client demand was solid and the sharpest since May 2020. Alongside domestic inflationary pressures, total new orders were dampened by challenging economic conditions in key export destinations and dollar strength, as new export orders fell steeply.
Cost inflationary pressures at manufacturers softened in October, with the pace of increase easing to the slowest in almost two years. Although still marked in the context of the series history, the rate of inflation reportedly eased following reductions in the price of some key materials including plastics and chemicals. Softer hikes in cost burdens were reflected in a slower rise in output charges. Manufacturers noted the weakest increase in selling prices since the end of 2020 in an effort to boost demand.
Weak demand and easing supply chain delays allowed firms to work through their backlogs during October. Work-in-hand fell solidly. Goods producers moderated the overall rate of job creation in response to the drop in order book backlogs, largely via the non-replacement of voluntary leavers.
Less marked delays in input deliveries in part reflected weaker demand for materials as firms scaled back purchasing and utilised their current inventories. Input buying fell steeply and at the fastest pace since May 2020.
Finally, output expectations regarding the year-ahead outlook at manufacturing firms slipped to the lowest in almost two-and-a-half years. Muted customer demand and inflation concerns reportedly dampened confidence.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:
“The US economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply. The decline was led by a downward lurch in services activity, fuelled by the rising cost of living and tightening financial conditions. While output in manufacturing remains more resilient for now, October saw a steep drop in demand for goods, meaning current output is only being maintained by firms eating into backlogs of previously placed orders. Clearly this is unsustainable absent of a revival in demand, and it’s no surprise to see firms cutting back sharply on their input buying to prepare for lower output in coming months.
“One upside of this drop in input buying has been a further alleviation of supply constraints, which alongside the stronger dollar have helped cool price pressures in the manufacturing sector.
“Although price pressures picked up slightly in the service sector due to high food, energy and staff costs, as well as rising borrowing costs, increased competitive forces meant average prices charged for services grew at only a fractionally faster rate. Combined with the easing of price pressures in the goods-producing sector, this adds to evidence that consumer price inflation should cool in coming months.
“The surveys therefore present a picture of the economy at increased risk of contracting in the fourth quarter at the same time that inflationary pressures remain stubbornly high. However, there are clearly signs that weakening demand is helping to moderate the overall rate of inflation, which should continue to fall in the coming months, especially if interest rates continue to rise.”
Last Thursday, I noted several recent anecdotes suggesting that the economy has suddenly hit a wall in the past month or so. This latest survey adds credibility to that:
- The fall in business activity was solid and stronger than that seen in September, as service providers signalled a quicker and solid decline.
- The rate of decrease was the second-fastest since 2009.
- Manufacturers and service providers alike recorded weaker client demand. Manufacturers seem to have lost pricing power.
- Employment was broadly unchanged on the month, including a fall in service sector staffing numbers with the first mentions of “some reports of lay-offs”.
- Firms’ optimism about the outlook meanwhile deteriorated markedly in October.
Goldman Sachs points out that the weakness in manufacturing is global as new manufacturing orders “declined sharply in major DMs (-6.2pt in the UK, -4.3pt in the US, and -3.5pt in the Euro area)”.
S&P Global, Haver, Goldman Sachs Global Investment Research
To me, however, the “solid decline” noted in services along with the “fall in service sector staffing numbers” are particularly significant. Demand for services is weak when it is supposed to more than offset waning demand for goods. This is negatively impacting labor demand to the point where we are now hearing about lay-offs in what is supposed to be a very tight market.
On October 14, I noted that total hourly wages rose only 0.3% MoM in each of August and September, a 3.6% annualized rate indicative of restraint on the part of business leaders. Yesterday we learned that “firms’ optimism about the outlook deteriorated markedly in October”. We can now bet that restraint will continue if not increase.
This chart shows the QoQ changes in wages of service-providing employees using end-of-quarter data. The blue bars are for all employees and the red bars for non-management employees, those where shortages were the most acute.
The deceleration is obvious, down to the 4% annualized range in Q3, trending towards pre-pandemic levels in the 3.5% range. A recent Goldman Sachs analysis sees similar trends in retail and food-services…
As a result of the significant improvement in labor market balance in both these industries, wage growth has cooled considerably. The six-month annualized pace of wage increases for retail workers has slowed to around 2% from a peak pace of nearly 7% peak, while wage growth for accommodation and food service workers remains very high but has slowed to 7½% from a peak pace of nearly 18%. In addition, wage growth for production and nonsupervisory workers—which is likely more sensitive to the balance between labor market demand and supply—has cooled by an even larger amount in both industries.
…while noting that
(…) progress in other industries is lagging.
For example, we have seen much less progress and the labor market remains extremely imbalanced in the wholesale trade, professional and business services, and health care and social assistance industries, which combined account for almost 40% of private-sector employment. And for all industries outside of retail trade the jobs-workers gap is higher today—and in most cases much higher—than it was prior to the pandemic. (…)
Although the three-month annualized pace of wage growth has generally dropped considerably from its post-pandemic peak, in almost all instances it remains much higher than it was prior to the pandemic, with wage growth remaining notably firm for workers in the information, arts & entertainment, and finance industries.
Based on the October flash PMI, these high growth sectors should also ease off in coming months.
Eventually, sooner than later in my view, the pace of charge inflation, which “picked up slightly” in October will also slow down.
This Friday, we get September data on consumer spending, PCE inflation, and the important Employment Cost Index for Q3, all critical data to feed next week’s FOMC.
The Federal Reserve Bank of Chicago reported that the Chicago Fed National Activity Index (CFNAI) held steady m/m at 0.10 in September. The August reading of 0.10 was revised from 0.00, and July was unrevised at 0.29. The Q2 average remained in negative territory.
The index’s three-month moving average improved to 0.17 in September after 0.04 in August. The figure was down from a recent high of 0.48 in December, 2021. During the last 10 years, there has been 79% correlation between the change in the Chicago Fed Index and quarterly growth in real GDP. (…)
The diffusion index, which measures the breadth of movement in the component series, rose to 0.35 during September from 0.16 in August. These readings compare to a low of -0.12 in June. Forty-eight of the components contributed positively to the September index while 37 contributed negatively.
The CFNAI is a weighted average of 85 monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity moves toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend. The CFNAI was constructed using data available as of October 20, 2022. September data for 51 of the 85 indicators had been published at that time. For all missing data, estimates were used in constructing the index.
A Better Quarter for GDP, a Worse Quarter for the Economy In the first half of the year, a contraction in gross domestic product belied rising demand. But the third-quarter GDP report will probably paint too rosy a picture.
Economists polled by The Wall Street Journal estimate that the Commerce Department’s GDP report on Thursday will show the economy grew at an inflation-adjusted 2.3% annual rate in the third quarter from the prior quarter, after contracting in both the first and second quarters. (…)
The 1.6% annualized contraction in GDP in the first quarter was driven by a rising trade deficit and reduced government spending. The second quarter’s 0.6% decline came about largely because of a swing in inventories and, again, lower government spending. Meanwhile, final sales to private domestic purchasers, which better reflects underlying demand in the economy, rose at a 2.1% annual rate in the first quarter, and a 0.5% rate in the second. It is this dynamic that helps underscore why, despite many people’s belief that two consecutive quarters of GDP contraction represent a recession, the National Bureau of Economic Research, which has been calling U.S. recessions since before GDP was a thing, wasn’t about to pronounce a downturn.
Conversely, in the third quarter it looks as if GDP has received a massive boost from trade—data for July and August show the trade deficit narrowed, which effectively means that more demand was met by domestic production. A widely followed tracking estimate from the Federal Reserve Bank of Atlanta puts third-quarter GDP growth at 2.9%, with a 2.2 percentage-point contribution coming from trade. But it shows the growth rate for final sales to private domestic purchasers slowing to just 0.2%. And another widely followed tracking estimate, from S&P Global, forecasts the underlying demand measure contracting at a 0.4% rate. (…)
(…) It’s a dramatic reversal from just months ago, when people were fighting over a limited supply of apartments, getting on waiting lists or paying multiple application fees to land one home. Now, particularly in pandemic boom markets such as Las Vegas and Phoenix, the application piles have thinned out and listings are lingering longer. Measures of US household formation have turned negative. (…)
Rents nationally increased 7.5% in September from a year earlier, above pre-pandemic levels, but down from a peak jump of nearly 18% at the start of the year, when vacancies also were lower, according to Apartment List. Preliminary October data show a dropoff that’s faster than the typical seasonal decline and would be the steepest in month-over-month data dating back to 2017, said Igor Popov, the listing platform’s chief economist. (…)
These indicators lag the actual market. It might be six or nine months before the more recent slowdown is reflected in the CPI, said Mark Zandi, chief economist for Moody’s Analytics. (…)
Household formation is freezing up, sending apartment demand negative for the first time for any third quarter in at least 30 years, according to RealPage data dating back to 1992. Tenants are leaving rentals at normal rates. The problem for landlords is that a lot fewer are moving in, Parsons said. (…)
The slowdown is widespread, with rents falling month-over-month in September in 69 of the top 100 US cities. But it varies widely by geography, and many markets are still quite heated. Rents in the New York, San Diego, Miami and Orlando, Florida, areas, all jumped by at least 12% last month from a year earlier, according to Apartment List data, still gangbusters relative to pre-Covid levels.
It’s normal for rents to dip in the months leading into the winter holidays. But if demand doesn’t return by next spring, problems for landlords will worsen, Popov said. There’s a near-record amount of newly-built apartments under construction and heading for completion, adding to the rental inventory. (…)
MS Rates guru Matt Hornbach:
“…if global growth weakness continues to weigh on commodity prices, headline PCE inflation may annualized even lower, given tough comparisons to prices last year. So the tanker is turning, we think, and investors should start preparing for pink skies.
…Our core view is that the Fed will not deliver more hikes than priced in, and both inflation and economic data optics will allow them to do so…We think the environment remains conducive to consolidation of Treasury yields, as we head into an FOMC meeting where Powell could reinforce the recent Fedspeak, which seems to be cautioning against infinitely extrapolating higher terminal rates.”
Treasury Secretary Janet Yellen flagged the potential for buybacks of certain US government securities, after her department quizzed market participants on the potential for the maneuver to improve liquidity in the market.
“It’s something a number of” other governments “have done from time to time,” Yellen said in answering reporters’ questions after an event in New York Monday. “I don’t think it would be a main intervention tool we would use — but it’s conceivable that something could be done there.” (…)
How Cold War II Could Turn Into World War III History shows that nothing causes fiscal and monetary instability quite like multiple big, long conflicts.
Very long but must-read article by Niall Ferguson. My favorite parts:
(…) The events of this year have reminded us of what is at stake in cases of great-power conflict. The war in Ukraine qualifies because Russia is still clearly a great enough power that it would probably have achieved its annexationist aims by now had it not been for large-scale financial, military and technological assistance to Ukraine from the US, the European Union and other associated states. This is a big war, measured by both casualties and costs. (…)
Regrettably, major policy errors were committed in the second plague year of 2021. (…) Those who saw a better analogy with the Fed’s “great mistake” of the late 1960s have been vindicated by the persistence of inflation. (…)
Most accounts of the Great Inflation of the 1970s tend to underestimate the role that war played. (…)
I recently heard it said that the 2020s are not likely to be as inflationary as the 1970s because labor is less organized, so the risk of a wage-price spiral is lower. But I would draw your attention to a number of important differences that make our contemporary circumstances more worrisome than the situation in the 1970s.
Monetary growth rates were significantly higher between the second quarter of 2020 and that of 2021 than at any point in the 1970s. Year over year, they remained in double digits even after velocity, the rate at which money changes hands, had recovered.
Productivity growth is lower today in nearly all OECD countries than it was 50 years ago. Demographic trends are worse today, with a significantly higher ratio of dependents to the working-age population. Fiscal positions are worse today, with much larger amounts of government debt and projected deficits relative to GDP, not least in the US.
Financial markets are more complex today and therefore more fragile. There were no such things as liability-driven investments for pension funds in the 1970s. The onset of Covid in March 2020 exposed fragility in the US Treasury market not dissimilar to what we saw in the UK gilts market at the end of last month.
Then we had pollution; now we have climate change. Our political stability looks even worse than it seemed at the time of Watergate. (…)
The war in Ukraine is lasting much longer than the [Yom Kippur] war of 1973 (approaching eight months compared with 19 days). So far, there is no sign of détente in Cold War II — quite the opposite, in fact — so there is a non-trivial risk that we could soon witness a confrontation between the US and China over Taiwan.
Finally, although media attention currently focuses on the women’s protests sweeping Iranian cities, they coincide with the failure of the attempt to revive the Iran nuclear deal. The Tehran regime will likely speed up its effort to acquire a nuclear weapon, increasing the probability of war in the region, as no Israeli government will countenance a nuclear-armed Iran.
We may get lucky. We may get away with just re-running the 1970s (…).
Yet there is a much worse scenario, in which we get something closer to the 1940s, with regional conflicts coalescing into something like World War III — albeit with smaller armies, many unmanned weapons systems, and far more powerful and accurate bombs.
What makes me worry more about this scenario is the Biden-Harris administration’s new National Security Strategy, belatedly published last week. “We do not seek conflict or a new Cold War,” write the authors, presumably led by National Security Adviser Jake Sullivan. They then proceed to delineate an unmistakable cold war strategy. As they say, “the post-Cold War era is definitively over and a competition is underway between the major powers to shape what comes next.” In other words, Cold War II has begun, in all but name.
Strip away the woke stuff about “climate change … the greatest and potentially existential [problem] for all nations” and “the needs of the most marginalized, including the LGBTQI+ community,” and you are left with a significant amount of President Donald Trump’s NSS from five years ago, which was all about “great power competition.” In fact, the word “competition” appears 44 times in the new NSS, compared with just 25 in the 2017 edition. (…)
Given that China is clearly the administration’s higher priority, it is not immediately apparent what purpose is served by a protracted war in Eastern Europe. But a recent speech by Sullivan provided the answer. (…)
And here’s the key point. Sanctions on Russia, Sullivan declared, have “demonstrated that technology export controls can be more than just a preventative tool … they can be a new strategic asset in the U.S. and allied toolkit.” In other words, the US-led economic war against Russia is like a demo for China’s benefit: This is what we can do to you, too. (…)
The aim is to impair Beijing’s ability to deploy artificial intelligence by driving up the cost of computing in China, whether for companies or the government. (…)
As Edward Luce noted in the Financial Times, “The new restrictions are not confined to the export of high-end US semiconductor chips. They extend to any advanced chips made with US equipment. This incorporates almost every non-Chinese high-end exporter, whether based in Taiwan, South Korea or the Netherlands. The ban also extends to ‘US persons,’ which includes green card holders as well as US citizens.”
The most extraordinary thing about these measures is how little comment they have elicited in the media. Trump did nothing so radical. As Luce put it: “A superpower declared war on a great power and nobody noticed.” (…)
Scientists may have discovered a method for making magnets used in wind turbines and electric cars without the rare-earth metals that are almost exclusively produced in China.
A team from the University of Cambridge and colleagues from Austria found a new way to make tetrataenite, a possible replacement for rare-earth magnets, according to a research paper from the university. If the manufacturing process is proven to be commercially feasible, it could loosen China’s dominance of the rare-earth market where it accounts for over 80% of global supply.
US President Joe Biden earlier this year backed efforts to boost output of the critical materials, while the European Union’s foreign service this month said the bloc should diversify supply chains, including for rare-earth metals, away from China. In 2019, the Asian nation warned it could cut exports to hit back in its trade war with Washington. (…)
COVID-19: HERE WE GO AGAIN!
From Katelyn Jetelina: “Here we go again. Pandemic fatigue coupled with the most contagious Omicron subvariants yet, BQ.1.1 and XBB, are driving yet another viral surge across the globe. Pair this with waning immunity and suboptimal booster uptake among the vulnerable, and the U.S. may see what’s happening in Germany right now.”
