U.S. Business activity growth eases in November
November survey data signalled a slower rate of expansion in business activity across the US service sector. Although output growth eased slightly to a five-month low, the upturn in new business accelerated and was solid overall. Employment growth meanwhile reached a three-month peak, which helped alleviate capacity pressures. In line with this, backlog accumulation softened to a five-month low. Inflationary pressures intensified with both input prices and output charges rising at quicker paces. The latest survey also indicated a fall in business confidence to the joint-lowest since February.
The seasonally adjusted IHS Markit U.S. Services Business Activity Index registered 54.5 in November, down from 55.3 in October. Although the latest index reading indicated a slightly weaker output expansion, the overall rate of growth was strong by recent standards nonetheless. Anecdotal evidence suggested that increases in activity were due to greater new order volumes and robust client demand.
New orders received by service providers continued to rise in November, with the pace of expansion accelerating from October’s six-month low. Panellists attributed the improvement in new orders to more favourable demand conditions and the acquisition of new clients.
Alongside an increase in new orders, firms reported that greater business requirements had led to employment growth. Job creation accelerated slightly to a solid rate that was the fastest in three months. Moreover, the latest upturn in payroll numbers was above the long-run series average.
Capacity pressures softened for the fourth successive month, and the overall accumulation of unfinished business was only fractional. Furthermore, the growth in outstanding business was the weakest since June.
Average prices charged for services increased further in November, with the rate of inflation accelerating. Panellists stated the rise was due to higher input costs which were passed on to clients. Cost burdens faced by service providers rose at a strong rate that was slightly below the series trend. Panel members noted that the increase in input costs was primarily due to higher goods prices.
The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index fell to 54.5 in November, down from 55.2 in October. Softer upturns in both the manufacturing and service sector led to a weaker overall output expansion. Moreover, the latest composite index figure indicated the slowest growth in private sector activity since June.
Chris Williamson, Chief Business Economist at IHS Markit:
(…) Mid-way through the fourth quarter, the surveys are still pointing to a reasonable GDP growth rate of approximately 2.5%.
The surveys’ employment indices are meanwhile pointing to solid non-farm payroll growth of circa 200,000 as companies continue to take on staff in encouraging numbers to meet rising order books.
Disappointingly, optimism about the year ahead deteriorated as companies grew increasingly cautious about the outlook for 2018, suggesting risk aversion may start to rise, which could hit hiring and investment. However, for now, businesses generally remain in expansion mode and the upturn shows few signs of losing momentum to any significant extent.
In terms of prices, the upturn continues to show signs of gradually feeding through to higher inflationary pressure. Average selling prices for goods and services showed one of the largest increases recorded over the past four years, linked to rising cost pressures.
Eurozone economic expansion strengthens as growth accelerates across ‘big-four’ nations
The final IHS Markit Eurozone PMI® Composite Output Index posted 57.5 in November, up from 56.0 in October and unchanged from the earlier flash estimate. (…)
Manufacturing production rose at the quickest pace in almost seven years in November and the headline index from the manufacturing survey – the Manufacturing PMI – posted a level bettered only once in its 20-year history.
The eurozone service sector also registered quicker output growth in November. Business activity rose to one of the greatest extents seen over the past six-and-a-half years.
The acceleration in the pace of economic expansion was broad-based across the countries covered, with pick-ups signalled in the ‘big-four’ nations and Ireland. France stayed at the top of the growth rankings for the second month, with its rate of increase hitting a six-and-a-half year record. (… )
Inflows of new orders improved at the quickest pace since February 2011. This was led by near-record growth of manufacturing new work, including an unprecedented rise in new export orders. Strengthening demand led to increased backlogs of work, encouraging firms to raise employment. Job creation hit a 17-year peak, with faster increases signalled in Germany, France, Spain and Ireland.
Price pressures intensified in November, with inflation of both input costs and output charges at or near to six-and-a-half year highs. (… )
The eurozone service economy continued to make solid progress in November. Business activity growth accelerated to a six-month high, as companies raised output in response to increased new order inflows and backlogs of work. At 56.2 in November, up from 55.0 in October, the final IHS Markit Eurozone PMI® Services Business Activity Index indicated an increase in output for the fifty-second successive month. The final index posting was unchanged from the earlier flash estimate.
The pace of increase in new business continued to hold steady at September’s six-month high. This tested capacity – backlogs of work rose at the quickest pace since March 2011 – and encouraged further job creation. Employment increased to the greatest extent in just over ten years. (…)
Input cost inflation rose to a nine-month high, as faster increases in Italy, France and Spain offset decelerations in Germany and Ireland. Meanwhile, output charge inflation across the euro area service sector held steady at October’s seven-month high.
Chris Williamson, Chief Business Economist at IHS Markit:
Comparisons with GDP indicate that the survey data for the fourth quarter so far are consistent with the eurozone expanding by 0.8%, with growth rates of 0.9% and 0.7% signalled for Germany and France respectively. Spain looks set for a 0.75% expansion while Italy could see GDP rise by 0.4-0.5%.
The survey data therefore suggest that business as a whole in the eurozone has so far been largely unaffected by political uncertainty in many countries, notably Germany and Spain, once again defying widespread expectations that growth would slow as uncertainty leads to more risk averse decision making. So far, the strengthening of the euro also shows no discernible impact on exports. (…)
Given the strength of order book growth and hiring, as well as the elevated level of business optimism, the eurozone should start the New Year on a solid footing. If survey data remain buoyant in December, expect to see 2018 growth forecasts revised higher. In terms of prices, core inflation has so far remained subdued, but the PMI price gauges and indicators of depleted capacity suggest that inflationary pressures will pick up next year.
China Composite PMI shows business activity rising at quickest pace since August
The Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated that growth momentum improved slightly in November. Although the Composite Output Index rose from October’s 16-month low of 51.0 to 51.6, the latest figure pointed to only a modest upturn in business activity that remained weaker than the series average.
Data broken down by sector indicated that business activity growth improved across both the manufacturing and service sectors during November. In the manufacturing sector, the pace of increase picked up from October’s four-month low, but remained moderate overall. Services companies meanwhile saw the quickest rise in activity for three months, though growth was likewise modest. The latter was illustrated by the seasonally adjusted Caixin China General Services Business Activity Index increasing from 51.2 to 51.9 in November.
Services companies signalled a sustained rise in new work during November. As was the case for activity, the rate of expansion improved to a three-month record, with a number of firms indicating that new client wins and promotional activities had helped to lift overall sales. New business also increased at manufacturers, though the rate of expansion softened since October. At the composite level, growth in new orders edged up to its strongest since August.
Greater operational requirements contributed to a further rise in service sector staff numbers midway through the final quarter of 2017. Though modest, the rate of job creation was the quickest seen since August. In contrast, manufacturing firms continued to register lower workforce numbers, with the rate of reduction the most marked in three months. Staff hiring at services companies offset another fall in manufacturing payroll numbers, so that employment remained stagnant at the composite level. (…)
Rates of cost inflation remained markedly different between manufacturing and services companies. Input prices faced by service providers rose only modestly during November. At the same time, cost burdens rose sharply across the manufacturing sector, despite the rate of inflation edging down to a three-month low. Higher raw material costs were commonly cited as a key factor driving up input costs. As a result, composite input prices continued to rise markedly in the latest survey period.
In line with the trend for input costs, services companies raised their prices charged at a modest pace in November. Nonetheless, the rate of increase was the quickest seen since July 2015. Manufacturers meanwhile raised their factory gate prices at a solid rate, with a number of surveyed firms mentioning the pass through of greater input costs to clients. Overall, composite output charges rose at a moderate pace that was slightly faster than that seen in October. (…)
The Coming Aluminum War
The Commerce Department last week announced a “dumping” investigation into Chinese aluminum imports. That’s one more sign that the Trump Administration is heading toward a major escalation in trade conflict that would hurt Americans.
Dumping investigations usually start when a company petitions the government, but Tuesday’s action was self-initiated, the first such case in 25 years. Commerce Secretary Wilbur Ross told industry executives that this will accelerate the Administration’s fight against “dumped” goods. In October the Commerce Department imposed duties of 97% to 162% on Chinese-made aluminum foil. (…)
The new Commerce investigation concerns common alloy aluminum sheet, which is crucial for industries from construction to home appliances. The U.S. uses 26 billion pounds a year, but domestic makers meet only 8% of that demand.
Tariffs would raise costs for U.S. manufacturers, which would likely lose more jobs than they’d create in the aluminum industry. That’s what happened when George W. Bush raised steel tariffs in 2002.
Higher prices on $600 million worth of aluminum may not have a major effect on the U.S. economy, but it signals the Administration’s willingness to start a trade war. If the Commerce investigation results in anti-dumping duties, Beijing will have a strong case to take to the WTO that could allow China to impose new duties on American goods.
Another Commerce investigation begun in April will determine whether aluminum and steel imports are a national security threat under Section 232 of the Trade Expansion Act. That decision, expected after the U.S. tax debate is finished, could give Mr. Trump significant latitude to raise tariffs.
In this case Mr. Ross’s target would be American allies, since China didn’t even break into the top 10 sources of U.S. steel imports in the first half of 2017. Canada provides 17% of U.S. imports, and Germany, South Korea, Taiwan and Japan are all bigger suppliers than China. Hitting their companies would invite retaliation and undermine U.S. foreign policy.
European Union officials have already said that U.S. farm products would be a priority target in a trade war. In July American farmers wrote to the White House warning about tariff blowback. U.S. officials might consider what’s more important: $600 million in aluminum or $160 billion in agriculture exports?
Tariffs on Canadian lumber have already pushed U.S. lumber prices up nearly 30% in 2017, a year when housing starts were down. (Chart from CalculatedRisk)
The U.S. companies with the most cash parked overseas
Just 30 of the largest companies in the S&P 500 index have almost $900 billion of cash stashed overseas, based on company data and estimates compiled by Credit Suisse. (…) Companies park their money in foreign subsidiaries to avoid having to pay the 35% U.S. corporate tax rate. If Republicans pass their tax overhaul legislation, companies would be able to bring that money back at a much lower rate (10% in the Senate bill, 14% in the House).
Source: Credit Suisse, @chrisdieterich (via The Daily Shot)
- This table provides a summary comparison of the House and the Senate tax bills. (The Daily Shot)
Source: WSJ.com, h/t Paul Menestrier; Read full article
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Distributional Analysis of the Tax Cuts and Jobs Act as Passed by the Senate
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This brutal chart shows what happens when the Senate tax cuts sunset http://on.mktw.net/2zI7MZc
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Here’s how the Republican tax cuts would actually be felt by regular Americans
(…) Under the Senate version of the tax bill, most of the individual income tax cuts are set to become effective in 2018, while the corporate tax cuts become effective in 2019. And according to that Tax Policy Center analysis, 75% of American tax units* would get a tax cut under the Senate tax bill in 2019 — the first year most of the cuts are in full effect.
The average tax savings for a tax unit in the middle-income quintile — that is, reporting income between $49,600 and $87,400 — would be $840.
But there’s a key caveat. Much of that savings is attributable to the cut in corporate income tax. Individuals benefit from a corporate income tax cut to the extent they have investments. TPC also believes they benefit because a portion of the corporate income tax — 20%, in TPC’s estimation — is borne by workers in the form of lower wages.
(…) by 2027, the Tax Policy Center found 48% of tax filers would face tax increases, while only 31% would get a tax cut, relative to current law. This is because most of the personal income tax cuts in the bill are set to expire after a few years, in order to comply with complex Senate budget rules.
Future Congresses may act to avert many of these tax increases by extending the tax cuts — though doing so would add even more to the federal debt than the $1 trillion-plus set to be added by this bill. (…)
(…) Total debt held by the public is forecast to rise to $17.52 trillion in 2022, from $14.92 trillion in fiscal 2017.
U.S. net interest costs rose to $274 billion in fiscal 2017, the most on record, according to the government’s fiscal 2018 budget.
They are projected to increase to $528 billion by 2022, which would account for 10.9 percent of total outlays, up from 6.8 percent this year, the budget shows, making interest costs the fastest-growing major expense over that period. (…)
U.S. investors overweight in stocks despite market fears: study Three out of four U.S. investors age 40 and older worry about a correction that will eventually end the long-running bull market in stocks, yet most refuse to head for the exits.
(…) Sixty-nine percent of older investors remain heavily exposed to equities, according to a national study released on Tuesday by Global Atlantic Financial Group, potentially leaving many ill-positioned for the inevitable downturn. (…)
52 percent said they believed the stock market could sustain continued growth for five years without a downturn of 10 percent or more. (…)
Forty-six percent of investors said they found equities and fixed income investments equally appealing, while 32 percent preferred equities and 22 percent preferred fixed income. (…)
