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Solid growth signaled by the S&P Global flash PMI in August points to robust GDP growth in excess of 2% annualized in the third quarter, which should help allay near-term recession fears. Similarly, a fall in selling price inflation to a level close to the pre-pandemic average signals a ‘normalization’ of inflation and adds to the case for lower interest rates.
However, this ‘soft-landing’ scenario looks less convincing when you scratch beneath the surface of the headline numbers. Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline. At the same time, service sector growth is constrained by hiring difficulties, which continue to push up pay rates and means overall input cost inflation remains elevated by historical standards.
The policy picture is therefore complicated, and hence it’s easy to see why policymakers are taking a cautious approach to cutting interest rates. However, on balance, the key takeaways from the survey are that inflation is continuing to slowly return to normal levels and that the economy is at risk of slowing amid imbalances.
Sustained, but unbalanced, growth
The headline S&P Global Flash US PMI Composite Output Index edged down from 54.3 in July to a four-month low of 54.1 in August. Output has now risen continually over the past 19 months. Although the pace of expansion slowed slightly in August, it remained among the highest seen over the past two years.
The solid growth picture in August points to robust GDP growth in excess of 2% annualized in the third quarter after the 2.8% increase seen in the second quarter.
However, growth has become increasingly uneven. While service sector activity grew at a solid and increased rate in August, the rate of growth falling just shy of June’s 26-month high, manufacturing output fell for the first time since January. The factory output decline was the steepest recorded since June 2023.
Worryingly, the manufacturing sector’s forward-looking orders-to-inventory ratio has fallen to a level not plumbed since the global financial crisis if the pandemic months are excluded.
The recent accumulation of unfinished inventory has been amongst the largest recorded in the history of the survey, often reflecting weaker than expected sales. Inflows of new orders into factories fell for a second successive month in August, dropping at the sharpest rate since December, in part due to the largest drop in export orders for 14 months.
Falling employment
Growing concerns about demand and the business outlook led to a near-stalling of employment growth in the manufacturing sector, which posted the smallest payroll gain since January.
A renewed fall in service sector jobs was meanwhile recorded after two months of job gains. However, falling employment in the service sector largely reflected difficulties hiring staff and replacing leavers, rather than being a symptom of weak demand.
Employment consequently fell overall in August, dropping for the first time in three months. Net job losses have now been reported in three of the past five months, marking the softest spell of payroll growth since the first half of 2020.
Prices rise at slower rate despite stubborn cost growth
The August flash PMI also saw average prices charged for goods and services rising at the slowest rate since January 2020 barring only the recent dip seen in January. Importantly, the rate of inflation is now only marginally above the average recorded in the decade prior to the pandemic, hinting at near ‘normal’ price pressures.
Selling price inflation notably cooled in the service sector, which has been a key area of recent concern to policymakers, dropped to the second-lowest since May 2020 and a level only marginally above the pre-pandemic average.
Measured across goods and services, the flash PMI’s selling price index is down to levels broadly consistent with the FOMC’s 2% CPI target.
The slower rise in charges occurred despite sustained upward pressure on input prices. Average costs across manufacturing and services rose at an unchanged rate in August, matching July’s four-month high.
Input price inflation consequently remained elevated by historical standards, most notably in the service sector. Although the latter cooled slightly from July’s four-month high, the rate of input cost inflation accelerated in manufacturing to the highest since May. Firms cited higher staff costs as a key cause of raised prices alongside higher raw material prices and increased shipping rates.
Outlook
S&P Global Market Intelligence has recently upped its forecast for US economic growth in 2024 from 2.4% to 2.6%, given the better-than-expected performance so far this year. The economy grew at a 2.8% annualized rate in the second quarter, and recent data – notably retail sales and the S&P flash Services PMI – have encouraged the view that robust growth will be sustained at a pace of approximately 2% into the third quarter.
While a rate cut at the September FOMC meeting is looking increasingly likely, bringing upcoming CPI and payroll data firmly into focus for data-dependent policymakers, wage pressures and service sector inflation will continue to be an important determinant of the speed and scale of any policy loosening.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
