U.S. Flash PMI: US private sector at near-stagnation amid renewed fall in demand
The headline S&P Global Flash US PMI Composite Output Index indicated only a fractional increase in output across the private sector midway through the third quarter. At 50.4 in August, down from 52.0 in July, the latest reading signalled the weakest upturn in activity since February. Persistent challenges stimulating demand in the manufacturing sector were accompanied by slower growth in service sector output.
Following broadly unchanged levels of production in July, goods producers returned to contraction territory in August. The latest drop in output was the second in the last three months albeit only modest. Although still registering an expansion, services firms meanwhile reported the slowest increase in activity for six months as high interest rates and inflationary pressures were seen to have weighed on customer spending.
Softer demand conditions were evidenced by the first decrease in new orders at US firms since February. Manufacturers faced greater challenges driving demand as new orders fell at a quicker pace, while service providers saw the fastest drop in new business since the start of the year. Sustained pressure from inflation and high interest rates were often linked to the decline, with some firms also highlighting a greater need to invest in advertising to stimulate new sales.
Muted demand from key export markets, especially Europe, led to a renewed decrease in new export orders in August. The fall in foreign client demand extends the trend of contraction seen since June 2022 which was only broken briefly by a marginal expansion in July. The export drop was primarily driven by manufacturers, as service providers registered a slower expansion.
US firms were more upbeat in their outlook for output over the coming year in August. Although weaker than the series average, the degree of confidence picked up from July, with optimism buoyed by hopes of stabilization in interest rates, greater client demand and a moderation in price pressures. Businesses also mentioned plans to invest in marketing initiatives.
August data indicated only a fractional rise in employment. Although extending the current sequence of job creation that started just over three years ago, the pace of increase was the slowest over this period. Where growth in workforce numbers was noted, companies linked this to efforts to expand capacity. Nonetheless, weak demand and lower new orders resulted in job shedding at some firms, with mounting wage costs compounding decisions to cut staff.
Services providers reined in hiring activity as employment in the sector was broadly unchanged on the month. A lack of new business and some instances of difficulties retaining staff dragged on jobs growth. Meanwhile, manufacturers continued to see a rise in employment. The rate of job creation was the slowest since January, however, as voluntary leavers were often not replaced.
Strain on capacity dissipated further, as backlogs of work contracted at the sharpest rate since May 2020. Decreases in incomplete work at both manufacturers and service providers quickened from July.
Prices Upward pressure on operating expenses from greater wage bills, increased raw material prices and higher fuel costs led to a reacceleration in the pace of input price inflation in August. The rate of increase in costs was sharper than the long-run series average, as manufacturers and service providers recorded faster upticks. Although much slower than those seen through the last two years, the pace of increase in cost burdens at goods producers was the steepest since April.
In contrast, the rate of output charge inflation slowed during August amid efforts to boost sales. The pace of increase was historically elevated as firms continued to pass through higher costs to clients, but reports of customer requests for discounts and competitive pricing stymied upticks in selling prices. The overall increase was led by service providers, however, as manufacturers left output charges unchanged from July.
Manufacturing PMI
At 47.0, down from 49.0 in July, the S&P Global Flash US Manufacturing PMI signalled a solid deterioration in operating conditions midway through the third quarter. The decline was the second-sharpest since January, as a renewed drop in output and steeper decrease in new orders weighed on the overall performance of the sector.
Lower new sales led to retrenchment among manufacturers as input buying fell at a quicker pace. The marked drop in purchasing activity reflected a reduced need to store materials and finished items. Subsequently, manufacturing inventories declined further. Despite lower demand, vendor performance improved to the smallest extent since February. Some companies stated that a shortage of drivers at suppliers frustrated efforts to reduce delivery times.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.
“Companies report that demand is looking increasingly lethargic in the face of high prices and rising interest rates. A resultant fall in new orders received by firms in August could tip output into contraction in September as firms adjust operating capacity in line with the deteriorating demand environment. Hiring could likewise soon turn into job shedding in the coming months after a near-stagnation of employment in August.
“Rising wage pressures as well as increased energy prices have meanwhile pushed input cost inflation higher, which will raise concerns over the stickiness of consumer price inflation in the months ahead. One upside is that weak demand is starting to limit pricing power, which should help keep a lid on inflation around the 3% mark.”
Coming after the strong July retail sales report, the flash PMI suggests that the economy is not re-accelerating, quite the opposite actually. The goods inventory cycle remains in overhang while demand for services is fading.
Meanwhile, rising oil prices are adding to cost pressures, threatening margins.
How High a Rate Can Housing Take? Home builders are thriving despite the highest mortgage rates in a generation, but existing homeowners might have less to celebrate if high rates persist.
(…) On Wednesday the Commerce Department reported that a seasonally adjusted 714,000 new homes were sold in July, at an annual rate, which compared with 684,000 in June and 543,000 in July last year. This was still well below the 1.03 million clocked in August 2020, when home buying was surging, but a faster pace than the prepandemic year of 2019, when 683,000 new homes were sold. (…)
Toll Brothers on Wednesday, discussing results for its fiscal quarter ended July 31, said that the seasonal falloff in demand that it typically sees in August from July, as the summer home selling season winds down, has so far been much smaller than it typically experiences.
“The supply-demand imbalance created by a lower resale inventory compounds the impact of the persistent underbuilding of homes over the past 15 years,” said Toll Chief Executive Douglas Yearley. “Even before resale inventory dropped, there was a structural shortage of anywhere between three and six million homes in this country.” (…)
Data: FactSet; Chart: Axios Visuals
U.S. Corporate Bankruptcies On the Rise
(…) This graphic shows the surge in corporate bankruptcies in 2023 based on data from S&P Global.
So far in 2023, over 400 corporations have gone under. Corporate bankruptcies are rising at the fastest pace since 2010 (barring the pandemic), and are double the level seen this time last year.
Firms in the consumer discretionary and industrial sectors have seen the most bankruptcies, based on available data. Historically, both sectors carry significant debt on their balance sheets compared to other sectors, putting them at higher risk in a rising rate environment.
Overall, U.S. corporate interest costs have increased 22% annually compared to the first quarter of 2021. These additional costs, combined with higher wages, energy, and materials, among others, mean that companies may be under greater pressure to cut costs, restructure their debt, or in the worst case, fold.
Canadian retail sales, up modest 0.1% in June, signal sluggishness in consumer spending
Retail sales, which indicate how much consumers are spending on goods, rose by a modest 0.1 per cent month-over-month in June, just slightly better than economists’ expectation of no increase. In volume terms, retail sales actually declined 0.2 per cent.
That was the second consecutive month of slower growth, after May retail sales were little changed, up just 0.2 per cent, after strong gains in April.
Consumer spending was surprisingly strong in the first quarter of 2023 and into the spring, shocking central bankers and economists alike for its resilience in the face of higher borrowing costs. Now, however, consumers are showing signs of retreating – with a notable pullback in goods spending in recent months. Spending on services remains relatively strong. (…)
The small increase in June was led mainly by auto purchases, as sales from motor vehicle and parts dealers edged 2.5 per cent higher, while sales at new-car dealers rose 2.9 per cent.
Excluding gas stations, fuel vendors and motor vehicle dealers, retail sales dropped 0.9 per cent month-to-month. Sectors such as general merchandise and food and beverage retailers saw the largest declines. Receipts at supermarkets and other grocery retailers also showed signs of slowing after six months of monthly increases. (…)
Statistics Canada’s advance indicator suggests retail sales in July ticked up slightly, by 0.4 per cent, but that number is still subject to revisions. (…)
Turkey raises interest rates by 7.5 percentage points