US economy slows sharply in June amid renewed downturn in demand, but inflationary pressures cool
Latest ‘flash’ PMI™ data from S&P Global signalled the weakest upturn in US private sector output since January’s Omicron-induced slowdown in June. The rise in activity was the second-softest since July 2020, with slower service sector output growth accompanied by the first contraction in manufacturing production in two years.
The headline Flash US PMI Composite Output Index registered 51.2 in June, down from 53.6 in May. The decline in the index reading signalled further easing in the rate of expansion in business activity to a pace notably slower than March’s recent peak. Although service providers continued to indicate a rise in output, it was the weakest increase for five months.
Manufacturers fared worse, with factory production slipping into decline as the respective seasonally adjusted index fell to a degree only exceeded twice in the 15-year history of the survey, at the height of the initial pandemic lockdowns in 2020 and the height of the global financial crisis in 2008.
Weaker demand conditions, often linked to the rising cost of living and falling confidence, led to the first contraction in new orders since July 2020. Decreases in new sales for goods and services in June were the first recorded since May and July 2020, respectively.
Similarly, new export orders contracted at the steepest pace since June 2020 as foreign customers paused or reduced new order placements due to inflation and supply chain disruptions.
Inflationary pressures remained marked in June, as input costs and output charges rose substantially again. Although the pace of input price inflation eased to the slowest for five months, it was sharper than any seen S&P Global Flash US PMI Composite Output Index before April 2021. Alongside food, fuel, transportation and material price hikes, firms often mentioned that wages had increased to entice workers to stay, which added pressure to operating expenses.
At the same time, output charges rose at the softest pace since March 2021. Firms continued to highlight the pass-through of higher cost burdens to clients, but increasingly, firms stated that offers or discounts were being offered to encourage customer spending and ward off competitors.
Manufacturers and service providers alike registered slower increases in employment midway through 2022, as the rate of total job creation eased to the slowest since February. Despite ongoing reports of challenges hiring or retaining staff, weaker client demand and reduced pressure on capacity led to some firms not replacing leavers.
Backlogs of work across the private sector decreased for the first time in two years in June. The pace of decline in outstanding business was only marginal, but marked a stark turnaround from the sharp accumulation of pressure on capacity in May for goods producers and service providers alike. Declines in new orders reportedly allowed firms to work through backlogs of orders successfully.
Finally, business confidence slumped to one of the greatest extents seen since comparable data were available in 2012, down to the lowest since September 2020. Manufacturers and service providers were far less upbeat regarding the outlook for output over the coming year than in May, principally amid inflationary concerns and the further impacts on customer spending as well as tightening financial conditions.
At 51.6 in June, down from 53.4 in May, the S&P Global Flash US Services Business Activity Index signalled another softening in the rate of output expansion at service providers. The pace of increase was the slowest since January’s Omicron-induced slowdown and only modest overall.
Weaker growth in business activity was driven by a solid fall in new orders. Client demand dropped for the first time since July 2020, and at the steepest pace for over two years. Total new sales were also weighed down by the quickest decrease in new export orders since December 2020.
Average cost burdens increased at a marked pace in June, as supplier, material, fuel, transportation, and wage bills soared again. The rate of input price inflation was the softest for five months and eased notably from May, but was much quicker than the series average. Similarly, the pace of output charge inflation softened and was the slowest since March 2021. Although firms continued to pass-through hikes in costs to clients, some mentioned concessions were made to customers.
Service providers signalled a notable change in pressure on capacity during June, as backlogs of work fell for the first time in two years. As a result, the rate of job creation eased to the softest in four months.
Meanwhile, inflationary pressures, hikes in interest rates and weaker client demand all dampened service provider expectations for output over the coming year. Sentiment remained positive, but was at its lowest level since September 2020.
At 52.4 in June, down from 57.0 in May, the S&P Global Flash US Manufacturing PMI indicated a slower improvement in operating conditions across the goods-producing sector. The overall upturn was the weakest for almost two years as contractions in output and new orders weighed on the headline figure.
Declines in production and new sales were driven by weak client demand, as inflation, material shortages and delivery delays led some customers to pause or lower their purchases of goods. The falls were the first since the depths of the pandemic in mid-2020, and were accompanied by a renewed decrease in foreign client demand.
Average cost burdens continued to rise substantially and at a historically elevated pace in June. Hikes in vendor, material and fuel prices all spurred on inflation. Nonetheless, the rise in input prices was the slowest since April 2021. At the same time, efforts to entice customers to make purchases led to the softest rise in output charges since January. The rate of charge inflation was faster than in any period before May 2021, however.
Vendor performance deteriorated to the least marked extent since January 2021 in June. That said, weaker client demand led to a contraction in input buying and reduced efforts to stockpile materials and finished goods.
In line with a renewed fall in backlogs of work, manufacturers expanded their workforce numbers at the softest pace since February. Firms were able to work through their outstanding business as new orders declined.
Lastly, goods producers registered the lowest degree of confidence in the outlook for output over the coming year for 20 months in June. Despite hopes that demand will improve and investment increase, concerns regarding inflation, interest rates, supply chain disruption and the health of the wider economy weighed on expectations.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“The pace of US economic growth has slowed sharply in June, with deteriorating forward-looking indicators setting the scene for an economic contraction in the third quarter. The survey data are consistent with the economy expanding at an annualized rate of less than 1% in June, with the goods-producing sector already in decline and the vast service sector slowing sharply.
“Having enjoyed a mini-boom from consumers returning after the relaxation of pandemic restrictions, many services firms are now seeing households increasingly struggle with the rising cost of living, with producers of non-essential goods seeing a similar drop in orders.
“There has consequently been a remarkable drop in demand for goods and services during June compared to prior months.
“(…) Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession.
“A corollary of the drop in demand was less pressure on prices, with the survey’s inflation gauges for firms’ costs and their selling prices falling sharply in June to suggest that, although still elevated, price pressures have peaked.”
Two days ago, I posted World Economics’ Sales Managers Index for the U.S. which showed that “sales growth fell sharply in June”:
Here’s WE’s comments on its June survey results:
The United States economy is slowly tipping into recession according to the latest data from the Sales Managers Monthly survey.
Sales managers are very much the “front line” in terms of sensitivity to changing business conditions. Sensitive to contractual negotiations being deliberately slowed down. Sensitive to expected contracts “in the bag” being suddenly cancelled. And most of all sensitive to “budgetary problems” being increasingly cited as reasons for sales negotiations faltering.
Recall that Target, Walmart and several other retailers reported very weak sales in April and May.
Sales managers instruct their purchasing managers based on what they see on the front line and their current inventory position.
Yesterday’s purchasing managers survey confirms the SMI’s findings of weak domestic and foreign client demand and noted that:
- several previous orders have been paused and/or cut;
- goods producers are discounting…
- …and reducing input buying, stockpiling and hiring.
These real-time surveys confirm that the goods sector is in recession.
More consequential is the “solid fall in new orders” from service providers as “client demand dropped at the steepest pace for over two years”. Demand for services, supposed to offset poor goods demand, has also been weak lately. Mentions of renewed discounting and soft jobs growth add to the evidence that the services sector is also getting hit by the squeeze on real incomes.
The Eurozone and U.K. PMIs reveal similar trends in demand for services.
The only silver lining is that reduced demand and backlogs at overstocked and overstaffed businesses are having their usual effect: “although still elevated, price pressures have peaked”.
On June 30, we get consumer spending and PCE inflation for May. Starting in mid-July, we will get real-time info from corporate earnings releases and conference calls.
If S&P Global’s Chris Williamson is right (“Business confidence is now at a level which would typically herald an economic downturn”), the July 26-27 FOMC meeting will be quite challenging with the Fed realizing that the economy, far from being “very, very strong”, may actually be “in a downturn” with perhaps the first signs of slowing but “still elevated” inflation while wages are “soaring”.
- BTW:
Data: Indeed; Chart: Axios Visuals
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Powell Sees No Letup in Inflation Battle ‘We can’t fail on this. We really have to get inflation down,’ Fed leader tells Congress
Lawmakers pressed Federal Reserve Chairman Jerome Powell over how the central bank would manage trade-offs it could confront if its interest-rate increases slow the economy sharply but don’t reduce inflation quickly.
Mr. Powell on Thursday said that in such a scenario, the central bank would be reluctant to shift from raising rates to cutting them until it saw clear evidence that inflation was coming down in a convincing fashion.
“We’re going to want to see evidence that it really is coming down before we declare any kind of victory,” he told the House Financial Services Committee. (…)
“In that hypothetical situation, that would be a setting in which inflation could be expected to come down,” Mr. Powell said, which could meet a test the Fed has established to slow or stop rate rises. But he added, “I think we’d be reluctant to cut.” (…)
Typically, the Fed focuses on so-called core inflation, which excludes food and energy prices, because officials believe that measure provides a better gauge of underlying price pressures. But Mr. Powell said the Fed might be less willing to look past higher prices at the pump because that could push up consumers’ inflation expectations.
“There are some small signs, concerning signs” that inflation expectations are rising, Mr. Powell said. “And we just can’t allow that.” (…)
- Support grows among Fed officials for further 0.75 percentage point rate rise
- Recession in US and Europe ‘increasingly likely’, warn economists Aggressive rate rises and European energy supply worries are leading to sharp downgrades
America’s Cash Hoard Could Cushion a Downturn Americans have something that they usually lack heading into a recession: A lot of cash
(…) Federal Reserve data show that as of the end of the first quarter, U.S. households held $17.9 trillion in cash and cash equivalents, up a bit from the fourth quarter and much higher than the $13.7 trillion they had at the end of the first quarter of 2020. Indeed, before the pandemic, U.S. households never experienced anything like the increase in cash they have experienced over the past two years, and this remains true even after adjusting for the run up in inflation. (…)
People in the top 10% by wealth held 32% more in cash and cash equivalents in the first quarter from two years earlier, but people in the bottom half held 45% more. Cash held by households in all but the lowest income quintile rose sharply. It rose sharply for white, black and Hispanic households. It rose for college graduates and high-school graduates. It rose for millennials and Gen Xers and boomers. (…)
Meanwhile, after shooting higher when the pandemic hit, the saving rate—the portion of take-home pay that doesn’t get spent—has fallen recently, hitting 4.4% in April, which compares with a prepandemic average of 7.6%. But Barclays economists calculate that even in a scenario where inflation remains at its recent highs, it would take at least until the end of 2023 for such undersaving to drain off the excess cash households have built up. (…)
Will they spend it? How quickly?
Source: Bank of America Institute; h/t @SamRo and The Daily Shot
‘Coast to Coast’ Housing Correction Is Coming, Says Moody’s Chief Economist
A housing correction will reach from “coast to coast” in the US, but it will fall short of a crash, according to Mark Zandi, chief economist at Moody’s Analytics.
With the Federal Reserve introducing the biggest increase in interest rates in years to combat rising inflation, home prices will likely fall in the housing markets that are most “juiced,” says Zandi. Regions with signs of significant speculation, namely in the Southeast or Mountain West, can expect the pendulum to swing back. Cities and states due for a correction include Phoenix and Tucson in Arizona, the Carolinas, northeast Florida, and above all, Boise — “the most overvalued market in the country,” per Moody’s analysis.
If and when it comes, a drop in housing prices isn’t going to bring much immediate relief to renters, Zandi cautioned. With the supply of starter homes for buyers so limited, and interest rates rising, would-be buyers will have limited options to move from leases to loans. Rising permits and construction for multifamily housing will relieve pressure some, causing rent growth to increase less rapidly. (…)
Despite the broad reach of a looming price adjustment, a crash is unlikely, he says, for three reasons:
Housing vacancy rates are at an all-time low. Vacancy rates reached historic highs before the financial crisis more than a decade ago that led to the Great Recession.
The quality of mortgage underwriting is high. Most loans are “plain vanilla” 30-year or 15-year fixed-rate products, with no sign of the subprime or negative amortization activity that precipitated the foreclosure crisis.
While some markets are marked by speculation and flipping, nationwide the evidence for flipping is low.
“I just don’t see the the kind of mortgage defaults and distressed sales that would be necessary for big declines in housing values. That’s when you get crashes, when you have lots of foreclosures and a lot of distressed sales,” Zandi says. “That’s just not going to happen.”
- Netflix fires another 300 employees as it seeks to bring costs under control amid uneven subscriber growth. It’s the second round of cuts in the past two months.
Fed says U.S. banks can weather severe downturn comfortably The results of the Fed’s annual “stress test” exercise showed the banks have enough capital to to weather a severe economic downturn and paves the way for them to issue share buybacks and pay dividends.
China Lockdowns Impacted on 38% of Companies in June, Compared with 49% a Month Earlier
The June Sales Managers Index continues to illustrate the heavy toll being taken on the Chinese economy by continuing Government attempts at preventing the spread of Covid.
Life is gradually returning to many areas, but the impact, even in areas not locked down, has been severe, and continues to cause difficulties for many companies.
Manufacturing has been particularly badly affected with factories unable to operate entirely closed off from supply chains. The Manufacturing Market Growth Index came in close to a 25 month low in June, with a reading of 46.4.
Business Confidence in the Manufacturing sector registered a 28 month low in June, and the Staffing Levels Index and overall Manufacturing Sales Managers Indexes also registered sub 50 levels, indicating continuing recession in activity.
The low level recorded by the Staffing Levels Index is particularly significant as the Index records year on year growth (or decline in this instance), as opposed to month-on-month changes.
The Services sector did a little better, with Business Confidence back into the >50 positive growth zone. However the more general Services Market Growth Index stayed low with a reading of 46.8 indicating further contraction in service sectors throughout China.
Canada needs 5.8 million new homes by 2030 to bring prices down to affordable levels, CMHC says
Canada needs an additional 5.8 million homes by the end of the decade to help lower average home costs and ensure households are not spending more than 40 per cent of their disposable income on shelter, according to a new government report.
That target blows past the current projection of 2.3 million new homes by 2030, according to the Canada Mortgage and Housing Corp. report, and would require building of new homes to more than double from current levels.
Although home prices nationally are starting to drop due to a sharp jump in interest rates and borrowing costs, they are still at least 50 per cent higher than two years ago. As of May, the price of a typical home across Canada was $822,900, with values well above $1-million in the Vancouver and Toronto regions. (…)
The report laid out targets for home prices to be considered affordable by 2030. For example, in Ontario, the average home price should be $551,000 so that housing costs for the average household are affordable at under 40 per cent of the household’s disposable income. Last year, the average home price in the province was $871,000. (…)
Stock Funds See Exodus as Recession Fears Grip Investors
About $16.8 billion exited global stock funds in the week through June 22, with US equities seeing their first outflow in seven weeks at $17.4 billion, Bank of America Corp. said, citing EPFR Global data. Bonds saw redemptions of $23.5 billion, while investors moved $10.8 billion to cash and $0.6 billion to gold, the data show.
Bank of America’s custom bull and bear indicator remains at “maximum bearish,” strategists led by Michael Hartnett wrote in a note, which is a buy signal for stocks. For the year, investors have bought $195 billion of stocks and sold $193 billion of bonds, meaning capitulation has not been reached for equities, they said. (…)
Hartnett said last week that based on past bear markets — defined as a 20% drop for the index from recent highs — the current one for the S&P 500 would end in October with the index at 3,000 points. That’s 21% below current levels.
Morgan Stanley strategist Michael J. Wilson also sees the index dropping to 3,000 to fully reflect the scale of economic contraction. And Societe Generale SA’s Manish Kabra said this week that a 1970’s style shock amid stagnation with higher inflation could send the index crashing more than 30% from current levels.
By trading style, US small cap and large cap stocks led outflows. By sector, materials and energy saw the biggest redemptions. Technology, communication services and real estate had inflows.