US S&P Global Composite PMI Jul: 47.5 (est 52.4; prev 52.3)

A big drop in services drags the composite PMI into negative territory, weakest read since May 2020

US S&P Global Composite PMI Jul: 47.5 (est 52.4; prev 52.3)
- Services PMI: 47.0 (est 52.7; prev 52.7)
- Manufacturing PMI P: 52.3 (est 52.0; prev 52.7)
 (markiteconomics.com)

The July flash S&P Global (previously IHS Markit) Composite PMI declined for a fourth month, falling into contraction territory (below 50) at 47.5, the lowest level since May 2020 (and looking before the pandemic since 2009), and well below estimates for 52.4. The fall was driven by the services component which plummeted 5.7 points to 47.0. Manufacturing held up better falling just four tenths to 52.3, but that was still a 2-year low and the manufacturing output index did fall just into contraction territory at 49.9. Overall, the report noted “The downturn in output signalled a further loss of momentum across the economy of a degree not seen outside of COVID-19 lockdowns since 2009.”

New orders, which contracted for the first time in 23 months in June, did return to expansion territory but outside of June was the weakest in 2 years, and manufacturing new orders remained below 50. New export orders remained under 50 as well.

On input costs, “firms continued to highlight marked upticks in input costs at suppliers, as fuel, transportation, raw material and wage expenses rose further. However, the pace of input price inflation eased again from May’s series peak and was the softest for six months, despite being faster than in any period seen before May 2021.” This in turn resulted in another “substantial” hike in output prices. That said, “[a] number of firms stated that slower input cost inflation, greater competition and softer demand conditions led to some concessions being made to customers, however, helping to cool the pace of charge inflation to its slowest since March 2021.”

Employment did expand for the 25th month, but at the slowest pace since February (coming off 13-year highs in May). Growth in employment was stronger among services firms.

With the increased labor and subdued new orders, backlogs contracted for a second month and the steepest pace since May 2020. Finally, “business confidence among US companies slipped to the lowest since September 2020.”

As I noted the last two months, “This is exactly the cooling in demand that the Fed is looking for.” That said, prices remain elevated, while growth is slowing quickly (now turning to outright contraction in many areas), so the ability for them to thread the needle looks ever more elusive. The good news is employment remains solid for now, but it seems it’s a matter of time on that front (the commentary noted “firms are already reassessing their production and workforce needs, resulting in slower employment growth”. I said last month “those above 50 prints could be coming to an end, and until we see prices really start to come in, it’s unlikely the Fed will be taking their foot off the brakes on the economy, and softening demand and still high prices is not a great recipe.” So now those above 50 prints have come to an end, and prices remain sticky. That said, you always have to be careful with sentiment surveys as they are not “hard” data. Sometimes people tell you what they want you to hear even if the hard data is not entirely consistent. Hopefully prices are coming down quicker than advertised (and they are already at a 16-month in terms of pace of acceleration), which will allow the Fed to pivot if the hard data follows this soft data into contraction territory. I mean, I can hope right?

Here was the commentary:

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The preliminary PMI data for July point to a worrying deterioration in the economy. Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis, with the survey data indicative of GDP falling at an annualised rate of approximately 1%. Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook.

“An increased rate of order book deterioration, with backlogs of work dropping sharply in July, reflects an excess of operating capacity relative to demand growth and points to output across both manufacturing and services being cut back further in coming months unless demand revives. However, with companies’ expectations of future growth slumping to the lowest since the early days of the pandemic, any such revival is not being anticipated. Instead, firms are already reassessing their production and workforce needs, resulting in slower employment growth.

“Although supply constraints remained problematic, constraining economic activity, the weakening demand environment has helped to alleviate inflationary pressures. Average prices charged for goods and services consequently rose at a much reduced rate in July, the rate of inflation still running high by historical standards but now down to a 16-month low to provide some much needed good news amid the ongoing cost of living crisis.

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