U.S. Services PMI: New business growth accelerates to fastest since March 2019
September PMITM data signalled a solid upturn in U.S. service sector business activity, albeit one that was slightly slower than August’s recent high. The expansion was largely driven by a faster rise in new business. Quicker growth in new sales was supported by another strong increase in foreign client demand. As a result, employment growth remained historically marked, with firms mentioning strains on capacity. Business confidence, however, sank to a four-month low amid concerns regarding the coronavirus disease 2019 (COVID-19) pandemic.
Input costs rose at a strong rate, but one that was outpaced by the increase in selling prices, as firms passed on higher costs to clients.
The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 54.6 in September, down slightly from 55.0 in August, but matching the earlier released ‘flash’ estimate. The solid rise in business activity was commonly linked to stronger demand conditions. The rate of growth was the second-fastest since March 2019 and solid overall despite softening from that seen in August.
The rate of new business growth accelerated in September, as the respective seasonally adjusted index moved further away from April’s nadir. The strong expansion was the sharpest since March 2019, as total new sales were boosted by strengthening customer demand. The upturn was aided by a fourth successive monthly rise in new export orders. Moreover, the expansion in foreign client demand was the second-strongest since data collection for the series began six years ago.
In line with greater new business inflows, firms increased their workforce numbers in September. The rate of job creation was strong overall and the second-quickest since February 2019, as many firms stated that insufficient capacity to process new orders had driven hiring.
At the same time, backlogs of work rose for the third month running and at a solid pace.
Meanwhile, input costs increased at a sharp, albeit softer pace in September. Service providers noted that higher input prices were due to greater wage and equipment costs, with many highlighting the uptick in PPE prices. The rate of inflation was faster than the series trend and among the quickest since November 2018.
Reflecting higher input prices and sharper new business growth, firms were able to pass on cost burdens to their customers through greater output charges. Selling prices rose at the fastest rate since September 2018 and outpaced the rise in cost burdens, as firms took advantage of stronger demand conditions.
Nevertheless, business expectations regarding the outlook for output over the coming 12 months slumped at the end of the third quarter. Although optimistic of a rise in business activity, hesitancy among service providers reportedly stemmed from concerns relating to the ongoing COVID-19 pandemic and the impact on future demand.
The IHS Markit Composite PMI Output Index* posted 54.3 in September, down fractionally from 54.6 in August. Manufacturing firms registered the fastest increase in output since November 2019, as service sector companies noted a solid rise in activity.
New business rose at a sharper rate in September, as service providers recorded the strongest expansion in client demand since March 2019. New export orders also rose modestly at private sector firms.
Meanwhile, pressure on capacity largely drove a further rise in workforce numbers, with both manufacturers and service sector firms expanding their staffing numbers.
Nonetheless, concerns surrounding the upcoming presidential election and the ongoing COVID-19 pandemic weighed on business confidence, which slumped to a four-month low.
Finally, selling prices rose sharply and at a faster rate than input costs as firms passed higher input prices on to clients.
Remember that PMI surveys are diffusion indices. The chart below illustrates how weak consumer expenditures on services (some 50% of GDP) remain. From February, spending on goods rose $257B (+5.6%) but services sank $765B (-7.4%).
Second Covid-19 Wave Rolls Through Europe Rising hospitalizations and deaths are prompting governments to impose more restrictions, from travel bans in Madrid to the closure of bars in Paris.
Confirmed cases in France, Spain, and the U.K. are now higher on an average day than at the peak of this spring’s emergency, although the trend also reflects better detection of the virus. Infections also have accelerated in Italy and Germany in recent days.
The health crisis isn’t as acute as in March and April, when hospitals in the worst-hit regions of Italy and Spain didn’t have enough intensive-care beds to treat all severely ill Covid-19 patients. But European authorities are worried that the strain on hospitals could return.
European governments, anxious to sustain the continent’s economic recovery from its sharp contraction this spring, continue to rule out a return to full-blown lockdowns and are relying on lighter restrictions on socializing and movement.
French official Monday announced new restrictions in the Paris region, where infections are rising quickly and some 36% of life-support beds are occupied by Covid-19 patients. (…)
Italy has been alarmed by a sudden surge in daily infections to over 2,600, compared with levels of roughly 1,500 for much of September. Most people currently testing positive have mild or no symptoms, but the number who need hospital treatment is rising. (…)
New Covid-19 cases in Germany, which have been trending slowly up since mid-July, rose sharply last week, hitting 2,731 on 1 Oct., the highest level since April. Germany’s disease-control agency, the Robert Koch Institute, said parties and family gatherings, including weddings, birthdays and funerals, were the main sources of new infections. (…)
Spain, which has been struggling to contain Europe’s biggest outbreak, is recording more than 10,000 daily cases on average, a more than 10-fold increase since July. Deaths from Covid-19, which during the summer rarely exceeded 10 a day, have risen to more than 120 a day.
In Belgium’s capital of Brussels, hospitals over the weekend began redirecting coronavirus patients to other parts of the country, to keep beds free for patients with conditions other than Covid-19. The number of daily new infections in Belgium has surpassed 2,000, up from around 500 a day in August.
The U.K. recorded on average more than 8,500 cases a day over the seven days through Oct. 1—five times the rate recorded a month earlier. In that time, hospital admissions have tripled to around 380 a day and deaths have risen to 40 a day from fewer than 10.
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Canada Clamps Down as Second Virus Wave Hits Major Cities
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Russia’s Second Wave Raises Risk of Economic Scars
- In the USA:

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EU fast-tracks process for Pfizer and BioNTech’s Covid-19 vaccine German group says any accelerated regulatory approval would not dilute safety standards
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How to End the Pandemic This Year
UNTWITTY TWEETS
Richard Bernstein (@RBAdvisors) asks: “#COVID19 cases are rising now in 38 states. Can US #economy hit on all 8 cylinders as many expect when people are increasingly sick? Our cyclical/defensive barbell seems appropriate.”
But Cornerstone Macro’s Nancy R. Lazar (@NancyRLazar1) argues that weak consumer demand, 68% of GDP, will be offset by increased capex. “Capex is rolling. Core cap goods shipments are on track to soar 31% q/q a.r. in 3Q, even if they’re flat in Sep. That will help offset any consumer sluggishness, if there’s no Phase 4 deal. Why is capex so underappreciated?” With these supporting charts:
My observations:
- Reproducing the 1950-1980 capex boom is unlikely given that corporate America is currently producing at 70% capacity, in a constant downward trend since 1973 (88%). A rate of 85% is optimal for most industries.
- Industrial production shows no signs of acceleration from a very tepid pace since 2000:
- Low utilization and low demand need no increase in capacity which, what the U.S. got since 2000:
- Declining capacity utilization has been broad and significant, except in crude processing, not an obvious future high growth sector. The Energy sector is 26% of total U.S. IP.
- Of the 74% non-energy IP, automotive is 5.5%, construction 5.4%, biz equipment and supplies 14%. High-tech? 1.8%! (More data? Here)
Let’s hope Nancy is right but the odds are not good.
ALL GOOD!
Yesterday was an “all good day”, starting with Trump’s youth cure while easily fighting COVID-19 with his 7 private doctors in his hospital suite.
Then Bloomberg’s Michael R. Strain took care of the K-shaped recovery: “As in the past, K-shaped recoveries should end well for everyone. It’s normal for rebounds to help the affluent first, but lower-income households will catch up as the economy starts expanding. Still, that shouldn’t be an excuse for Congress to be complacent about its obligation to spend money now to support struggling families and businesses.” Never mind there are still 26M Americans unemployed on the lower leg of the K.
But, heck, equities jumped yesterday, led by small caps, up 2.3% and microcaps, up 3.0%. Why?
- “a clear-cut Joe Biden win is emerging as a bull case for stocks. With the challenger’s lead widening in the polls and Trump’s campaign sidelined, investment strategists now say there’s less of a chance for a contested election. That would avoid a long and messy legal battle and provide certainty to markets, according to strategists from Citigroup to JPMorgan. (Bloomberg)
- No worries, a blue wave will prove bullish:
First to reassure us is Goldman Sachs who says “the polls suggest a “blue wave” in which Democrats gain unified control of Washington is becoming more likely” and promptly makes sure we don’t worry about that:
All else equal, such a blue wave would likely prompt us to upgrade our forecasts. The reason is that it would sharply raise the probability of a fiscal stimulus package of at least $2 trillion shortly after the presidential inauguration on January 20, followed by longer-term spending increases on infrastructure, climate, health care and education that would at least match the likely longer-term tax increases on corporations and upper-income earners. Using the Fed’s FRB/US model and assuming that the FOMC refrains from rate hikes until the economy is at full employment and inflation just above 2%, we estimate that the net effect of the package would be a frontloaded increase in output relative to potential of 2-3pp as well as a more backloaded boost to core PCE inflation of 0.2-0.4pp. (…)
While a blue wave would have mixed implications for broad US equity indices—after all, the Biden program does include a sizable increase in the corporate income tax rate by up to 7 percentage points—it would likely result in substantially easier US fiscal policy, a reduced risk of renewed trade escalation, and a firmer global growth outlook. These shifts should be clearly positive for cyclical sectors, as well as firms that pay most of their taxes outside the United States. In addition, we would expect a material backup in longer-term sovereign bond yields as well as support for our standing forecasts of higher commodity prices and a weaker US dollar.
But in mid-August, GS calculated that 2021 earnings would be 11.8% lower under Biden than under Trump, which included a negative GDP impact. Gotta be flexible on the sell side and go with the flow.

But who cares about earnings nowadays? It’s the economy, stupid!
Jason Furman, a professor of practice at Harvard who was chairman of the White House Council of Economic Advisers, 2013-17, reminds us that in today’s WSJ:
Biden’s Tax Plan Would Spur Economic Growth Wealth would be shared more broadly, and even free-marketeers see the benefit of more revenue.
Every four years a Democrat runs for president on a platform that includes higher taxes for the wealthy. And every four years a group of people predicts that the sky will fall if those plans are implemented. Yet every time their plans have been implemented, the sky hasn’t fallen—if anything, economic growth and business investment have been stronger under Democratic than Republican presidents.
Joe Biden’s proposals to raise taxes on households making more than $400,000 annually, and on corporations, are broadly consistent with the tax systems under the successful economies of Presidents Clinton and Obama. The Biden plan also includes a few innovations that would improve on its predecessors. It would devote revenue to an ambitious set of proposals to expand economic growth and ensure it is shared more broadly. (…)
The Biden tax plan would raise revenue to 19% of GDP by the end of his first term, in part by returning the top individual rate to 39.6% and undoing half of the 2017 corporate rate reduction. The revenue share of the economy would remain below the average during Mr. Clinton’s second term, a period of historically fast job growth. It would also be less than the 21% of GDP that the bipartisan Bowles-Simpson fiscal commission proposed in 2010. (…)
The Biden plan as a whole would boost the economy, as near-term stimulus massively outweighs the immediate tax increases in both quantity and bang-for-buck. Goldman Sachs found that the plan’s robust fiscal stimulus would add nearly 1 percentage point to the annual growth rate during a first Biden term. (…)
For good measure,
Lagarde Is Prepared to Add Stimulus, Cut Rates to Support European Recovery European Central Bank President Christine Lagarde said the bank is ready to inject fresh monetary stimulus to support the eurozone’s stuttering economic recovery from the Covid-19 pandemic, including by cutting a key interest rate further below zero.
Meanwhile,
U.S. House’s antitrust report hints at break-up of Big Tech firms: lawmaker The U.S. House of Representatives antitrust report on Big Tech firms contains a “thinly veiled call to break up” the companies, Republican Congressman Ken Buck said in a draft response seen by Reuters.
The House antitrust subcommittee is expected to publish its report this week on Amazon.com Inc, Apple Inc, Facebook Inc and Google owner Alphabet Inc.
A Buck representative confirmed to Reuters the authenticity of the draft response, which was first reported by Politico.
In the draft, Buck said he shared Democratic concerns about the power of Big Tech firms, with their penchant for “killer acquisitions” to eliminate rivals and self-preferencing in guiding customers to their other products. However, he objected to a plan to require them to delineate a clear “single line of business”. (…)