USA: Private sector business activity growth accelerates to fastest for eight months in March
US service providers registered a sharp upturn in business activity in March, according to the latest PMI™ data. The expansion in output quickened to the fastest for four months, amid stronger demand conditions and a steeper rise in new orders. Client demand strengthened despite a record rate of charge inflation. Output prices increased markedly as a faster rise in cost burdens was largely passed through to customers.
At the same time, pressure on capacity built despite employment rising at the steepest pace for almost a year. Backlogs of work expanded at the strongest rate since the series began in October 2009. Longer term growth expectations were less upbeat, however, as confidence in the year-ahead outlook slipped to the weakest for five months.
The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 58.0 in March, up from 56.5 in February, but lower than the earlier released ‘flash’ estimate of 58.9. The increase in business activity was steep and the quickest in 2022 so far, accelerating further from January’s Omicron-induced slowdown. Many companies stated that the easing of COVID-19 restrictions boosted footfall, with stronger client demand and a steeper rise in new business driving up output.
Service providers signalled a marked rise in new orders at the end of the first quarter, as new client acquisition and the further easing of COVID-19 restrictions strengthened demand conditions. The pace of new business growth was the fastest since June 2021 and quicker than the series average.
Total new sales were also supported by stronger foreign client demand during March. New export orders rose at a robust rate that was the sharpest for ten months. Companies noted that fewer restrictions on travel encouraged customer spending and drove new business from abroad.
On the price front, firms recorded a substantial increase in output charges during March. The rise in selling prices was the sharpest on record (since October 2009), as service providers reportedly passed through higher costs to clients, where possible.
The rapid uptick in output prices stemmed from a faster increase in input prices.The rate of cost inflation accelerated to the quickest since December’s series-record high, and was the third-steepest on record. Where higher cost burdens were reported, firms linked this to broad-based increases in input prices. Companies once again highlighted hikes in fuel, energy and wage bills as driving inflation.
In line with a faster rise in new orders, services firms recorded the quickest accumulation of backlogs on record in March. The pace of increase in the level of outstanding business accelerated for the first time since last October. Companies also stated that input shortages exacerbated challenges in working through incomplete business.
Higher levels of backlogs of work were noted despite employment rising at the fastest pace in almost a year. Although firms hired additional staff in response to greater business requirements, the receipt of new orders continued to place pressure on capacity.
Meanwhile, business expectations regarding the outlook for output over the coming year remained upbeat at the end of the first quarter. Optimism was buoyed by increased marketing activity and hopes of greater client demand and the reduced impact of any further COVID-19 variant. That said, the degree of confidence dropped to a five-month low amid inflation concerns.
The S&P Global US Composite PMI Output Index* posted 57.7 in March, up from 55.9 in February, to signal a sharp expansion in business activity across the private sector. The rate of growth was the fastest since last July, as manufacturers and service providers recorded steeper upturns in output.
Supporting the sharper uptick in activity was the quickest rise in new business since June 2021. Domestic and foreign client demand strengthened as easing COVID-19 restrictions continued to boost new sales.
Meanwhile, inflationary pressures intensified as supplier costs soared. Input prices rose at one of the fastest rates on record, whilst costs passed through to customers drove up output charges at the joint-sharpest pace since data collection began in October 2009.
Although private sector employment grew at a steep pace, pressure on capacity mounted amid severe raw material shortages, with backlogs of work expanding at a series-record rate.
Fed’s Brainard Says Reducing Elevated Inflation ‘Is of Paramount Importance’ Federal Reserve governor Lael Brainard expects the central bank to approve significant reductions in its $9 trillion asset portfolio at its policy meeting early next month.
(…) “It is of paramount importance to get inflation down,” Ms. Brainard said Tuesday at a virtual conference hosted by the Federal Reserve Bank of Minneapolis. “Accordingly, the committee will continue tightening monetary policy methodically through a series of interest-rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”
Longer-dated Treasury securities sold off sharply after Ms. Brainard’s remarks, which emphasized how the portfolio runoff would be larger and faster than the last time the Fed shrank its holdings. The yield on the benchmark 10-year Treasury note, which rises when bond prices fall, jumped to 2.554% Tuesday, from 2.465% just before she spoke and 2.409% on Monday.
Ms. Brainard’s remarks were notable not only because she is one of Fed Chairman Jerome Powell’s top lieutenants in shaping the central bank’s monetary-policy agenda but also because she had been one of the most vocal advocates last year warning against prematurely pulling back its stimulus. Ms. Brainard focused her remarks on the potential for higher inflation to hit low-income Americans hardest, and her shift underscores the Fed’s alarm at high inflation and its urgency to withdraw stimulus quickly. (…)
Ms. Brainard said on Tuesday that the Fed would allow the portfolio to shrink faster than last time and that it would have a much shorter phase-in of the larger reinvestment caps. (…)
Ms. Brainard expected that the asset-portfolio runoff would further remove stimulus beyond those projections so that the Fed would reach a “more neutral position later this year,” she said. “The full extent of additional tightening” after that will depend “on how the outlook for inflation and employment evolves.”
Ms. Brainard didn’t provide a forecast for inflation in her prepared remarks, but she said Russia’s invasion of Ukraine was a “seismic geopolitical event” that had delivered a global commodity supply shock likely to further boost inflation and exacerbate disrupted global supply chains.
At the same time, Ms. Brainard said she expected several factors to bring supply and demand into better balance this year, which could bring inflation down. She cited factors including a slowdown in foreign growth, a decrease in U.S. federal spending, an increase in the supply of workers and a drop in demand because of higher borrowing costs. (…)
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BIS Head Says Era of Weak Inflation Might Be Over Agustín Carstens suggests possibility of painful adjustment as public gets used to higher interest rates again
(…) “We may be on the cusp of a new inflationary era,” Mr. Carstens said. “The forces behind high inflation could persist for some time. New pressures are emerging, not least from labor markets, as workers look to make up for inflation-induced reductions in real income.”
What’s more, “some of the structural disinflationary winds that have blown so intensely in recent decades may also be waning,” Mr. Carstens said. “In particular, there are signs that globalization may be retreating,” he said, adding that between pandemic impacts and geopolitical issues, some companies might be pulling back from the sprawling global supply chains that had been delivering low inflation over recent decades. (…)
He said that central banks might not be able to continue shrugging off supply-related price shocks. Central banks generally don’t push up rates to try to temper such increases, but Mr. Carstens said that might need to change, because these supply shocks can be the tinder for a broader inflation fire. (…)
“It seems clear that policy rates need to rise to levels that are more appropriate for the higher inflation environment,” Mr. Carstens said, and “most likely, this will require real interest rates to rise above neutral levels for a time in order to moderate demand.” (…)
Add Declining Immigration to Problems Weighing on the Labor Market Industries that depend on foreign-born employees face high job vacancy rates and wage pressures. It’s a struggle for many nursing homes and house builders.
(…) For several years after the 2007-09 recession, roughly a million people moved to the U.S. annually. That pace started to slow during the Trump administration and fell to a trickle after the Covid-19 pandemic started.
The slowdown has left the U.S. with 2.4 million fewer immigrants of working age—about 1% of the working-age population—than if pre-2017 immigration trends had continued, according to Giovanni Peri, a labor economist at the University of California, Davis. The change is being felt as the economy rebounds and many employers struggle to replace workers who were laid off or quit since early 2020, contributing to wage pressure and inflation. (…)
In the 12 months ended last June 30, about 247,000 people moved to the U.S., less than a quarter of the 2016 level and half that of 2019, according to U.S. census data. Those figures don’t distinguish between people who came to the U.S. legally and those who didn’t.
In five top countries where people receive green cards to work in the U. S.—Mexico, the Dominican Republic, Vietnam, the Philippines and China—the fiscal year ended last September saw declines of half to two-thirds in green-card issuance from two years prior, according to Department of Homeland Security figures. (…)
The Fed is thus clearly engaged in trying to reduce demand to fight largely restricted supply-induced inflation. This when the war in Ukraine is totally upsetting world supplies of energy, food and semi-conductors. So far, businesses have been able to pass on their cost increases. But if the Fed successfully crimps demand, profit margins will initially decline faster than inflation.
- Global manufacturers are stockpiling inputs to protect revenues and margins, boosting demand and prices along the way.
From my lens, Europe, UK and China appear most vulnerable to a margin squeeze from slower revenue growth and broadly rising prices, particularly energy costs.
North American economies look relatively better but that hawkish Fed could upset financial markets before actually stifling demand.
China: Services activity drops in March as virus containment measures tighten
The recent rise in COVID-19 cases in China and restrictions to limit the spread of the virus led to a marked drop in service sector activity at the end of the first quarter of 2022. The fall coincided with a steep decline in new work, which was often linked to restrictions on mobility and reduced customer numbers. Average input costs rose at an accelerated and solid pace, while prices charged by services companies rose only slightly. The ongoing pandemic and war in Ukraine meanwhile weighed on business confidence, which edged down to its lowest for just over a year-and-a-half in March.
The seasonally adjusted headline Business Activity Index fell from 50.2 in February to 42.0 at the end of the first quarter, to signal a renewed contraction of services activity. Furthermore, the rate of reduction was the steepest seen since the initial onset of the pandemic in February 2020 and sharp. Businesses frequently mentioned that tighter virus containment measures had disrupted operations and weighed on client demand in March.
Chinese services companies registered a solid and accelerated fall in total new work at the end of the opening quarter. Notably, the rate of decline was the fastest since March 2020. Pandemic-related restrictions, notably those on mobility, were frequently attributed to lower customer numbers and softer demand conditions. New export business fell for the third month running. Though modest, the rate of decrease was the fastest since October 2020.
Staffing levels at services companies fell in March, as has been the case throughout the first quarter, though the rate of reduction was only fractional. Panel members indicated that the pandemic and softer demand conditions had reduced firms’ appetite for additional staff.
At the same time, disruption to business operations led to a further increase in the level of outstanding business at Chinese service providers. Though mild, the rate of accumulation was the quickest seen since last December.
March survey data signalled a stronger rise in input costs faced by services companies. The rate of inflation was solid overall and quicker than the series average. Companies cited greater costs for raw materials, energy, food, transport and greater expenditure on pandemic-protection measures as having driven up cost burdens in the latest survey period.
Although expenses rose at a quicker pace, fees charged by services companies rose only slightly during March. Moreover, the rate of increase was the softest seen in the current seven-month period of inflation. While some firms raised their charges due to higher input costs, others mentioned that pricing power was limited due to subdued demand conditions and efforts to attract new business.
When assessing the 12-month outlook for business activity, Chinese services companies were generally upbeat that output would expand over the next year. However, the degree of optimism slipped to its lowest for19 months amid concerns over how long business operations would be impacted by the pandemic, and the war in Ukraine.
German Factory Orders Fall as Economy Faces Ukraine War Fallout
A total energy embargo against Russia is now unstoppable, whatever Germany thinks
This morning:
Germans to Face Higher Meat and Dairy Prices as War Boosts Costs
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