Yves here. Keep in mind that this PMI data simply reflects existing trajectories. There are other inflation boosters waiting in the wings, such as a strike on US east coast ports and intensification of fighting in the Middle East increasing oil prices.
By Wolf Richter, editor at Wolf Street. Originally published at Wolf Street
Underlying inflationary dynamics are picking up steam, after having cooled a lot. Today, S&P’s preliminary Flash US Composite PMI (Purchasing Manager Index), based on data collected from September 12 through 20, entailed multiple warnings about the Fed’s future rate cuts, in light of reaccelerating selling-price inflation in both the services and manufacturing sectors, and in light of input-cost inflation in services.
The price gauges of the PMIs “serve as a warning” that “the FOMC may need to move cautiously in implementing further rate cuts,” the report said. We’ve already seen the second month-to-month re-acceleration in a row of CPI inflation.
Overall, “business activity growth remained robust in September,” the PMI report said. The flash Composite PMI, which combines services and manufacturing PMIs, came in at 54.4 in September, indicating solid growth (above 50 = growth compared to the prior month). With July and August also showing solid growth, September is “rounding off the strongest quarter since the first three months of 2022.”
The Composite PMI was driven by strong growth in services, which make up the majority of the economy, and “modestly falling output” in the manufacturing sector.
Continued Divergence Between Services and Manufacturing
The S&P’s Flash Services PMI for August came in a 55.4, meaning growth at a “solid pace,” with “the rate of increase running at the second-highest seen over the past 29 months.” The Services PMI has shown roughly the same pace of solid growth for the past five months. Services are the majority of the economy, and they carry it.
Manufacturing, which accounts for a much smaller part of the economy and employment, has been in the doldrums coming off the phenomenal spike during the pandemic. For September, the flash Manufacturing PMI ticked down “modestly” to a 15-month low of 47 (below 50 = contraction compared to the prior month).
Inflation Dynamics Entail a Warning to the Fed About Rate Cuts
“Prices charged for goods and services are both rising at the fastest rates for six months, with input costs in the services sector – a major component of which is wages and salaries – rising at the fastest rate for a year,” the report said.
“The “reacceleration of inflation” suggests that “the Fed cannot totally shift its focus away from its inflation target as it seeks to sustain the economic upturn,” the report said.
“The survey’s price gauges meanwhile serve as a warning that, despite the PMI indicating a further deterioration of the hiring trend in September, the FOMC may need to move cautiously in implementing further rate cuts,” the report said.
Selling price inflation in both, services and manufacturing: “Prices charged rose at the fastest rate for six months, pushed higher by input cost growth accelerating to a one-year high,” it said.
“The acceleration of selling price inflation was common across goods [manufacturing] and services, in both cases hitting six-month highs,” and “in both cases running above pre-pandemic long-run averages to point to elevated rates of increase,” it said.
Input cost inflation: services diverge from manufacturing. “Service sector input cost growth notably struck a 12-month high, linked to reports of wage growth,” it said.
“Higher charges were driven by increased costs, with input costs rising at fastest pace for a year in September,” and it was “often linked to the need to raise pay rates for staff,” it said.
“In contrast, manufacturing input cost growth cooled to a six-month low thanks to lower energy prices and fewer supply chain price pressures,” it said.
How the PMIs work. They are based on surveys of a panel of company executives that get the survey each month.
A value = 50 means that there was no change in the current month from the prior month: the number of respondents who said there was growth equals the number of respondents who said there was a decline, and the rest said there was no change.
A value higher than 50 means that more respondents said there was growth than said there was decline, and the rest said there was no change, in the current month from the prior month.
Conversely, a value below 50 means decline. The distanced from 50 indicates the pace of growth or contraction in the current month from the prior month.
Nothing new, Wolf has been writing about services inflation running hot for months.
However its another indication that the 0.5% cut had more to do with job protection than anything else.
The “job protection” narrative is only two years from the 2022 Jackson Hole Central Bank Pain Conference. They got nowhere near the “pain” they wanted to cause because of a lot of well-connected people making bad loans and well-connected over-leveraged gamblers. And banks acted like they forgot how to trade bonds.
Decades of the silliest ZIRP policy left time bombs all over the place and now there are more geopolitical tensions time bombs.
The Fed is just going to keep making their friends as comfortable as possible through it all. The narrative is whatever sounds good enough to let them get away with it.
I’ll grab an imaginary crystal ball. I see this happening: more interest rate cuts and more layoffs (esp. after the holidays).
It will still be called a soft landing as long as profit margins are fine.
I agree with JW; Wolf has been warning about inflation shifting to services for a while now. It’s just anecdata, but I hear a lot of people saying the job market is terrible right now. I’m in the middle of a major career change myself, and hiring definitely isn’t hot where I am either, despite the feds supposedly “stimulating” the area directly.
That said, I think most commentators including Wolf are still missing (or at least not discussing) some of the bigger stagflationary picture. Beyond the supply shocks Yves mentioned, I’m of the opinion that both US fiscal and monetary policy are now mostly wiggling levers on a fundamentally busted machine.
The US is:
A. structurally and culturally import dependent while continually alienating most of the world at the same time.
B. structurally and culturally incapable of rewarding productive and punishing wasteful behavior (at all levels of the economy).
As long as those two things are true, the Fed will just be playing with a see-saw on a sinking ship.
The proverbial money quote. Your A and B points also ring true.
The ever expanding global wars and creeping climate disaster will go a long way to kneecapping groaf narratives, too. It’s hard to build a productive economy when you’re blowing stuff up, getting caught in wildfires, or drowning in hundred-year floods… or all three.
Woe to a dying Empire of bone and blood!
I agree. I also think we’ve gamed our metrics to the point where they no longer provide good data for people to interpret what is happening. JOLTS responses have gotten worse. Inflation measurements are now refined to the point where the exclude everything people actually care about. We’ve created a hall of mirrors for ourselves, and we find our reflection so enchanting, that we can’t quite understand what all those terrible sounds are or where they’re coming from…
excellent,
“The US is:
A. structurally and culturally import dependent while continually alienating most of the world at the same time.
B. structurally and culturally incapable of rewarding productive and punishing wasteful behavior (at all levels of the economy).
As long as those two things are true, the Fed will just be playing with a see-saw on a sinking ship.”
what little is left of american production says, made in the U.S.A. with global components.
bill clintons hedge funds have done a tremendous job off shoring just about anything that can create wealth for the american worker and our country.
leaving us with service, that creates little or no spin off jobs or value creation.
free trade is simply debt, the only way to pay those debts, is to steal the wealth and labor of other countries.
free trade requires wars and a police state.
“free trade is simply debt, the only way to pay those debts, is to steal the wealth and labor of ALL countries. ”
Fixed that for ya.
The Fed is damned if they do, damned if they don’t. (and the escape goat)
Boxed in by the legacy of ZIRP, >6% GDP federal deficit, anti-Russia sanctions(and subsequent US investment boom as some industrial production gets shifted from Eurozone largely to the US right-to-work states), and assorted misc. disruptions caused by a (deservedly) angry labor force.
Why JPow hasn’t yet spiked the football and annouced his early retirement effective January 20, I don’t know, lol.
It’s going to take more than 2 years to fixed a mess that was decades in the making.
High rates have an unintended consequence that noone is talking about and indeed if it wasn’t affecting me personally, I might. ot know about it. Lack of mobility. I recently had to move cities for a work opportunity. However my house in prior city has been sitting on the market since Jan. I’ve done multiple price reductions but nothing helps. I can’t even get people to come to an open house let alone make an offer. If I didn’t have a decent job, I would have had to let the house go back to the bank long ago. That would also kill my credit though.
As Louis Fyne put it: this is the legacy of ZIRP.
Rates were raised moderately in the historical scheme of things. And Fed Fund rate barely stayed above 5 itsy-bitsy percent for a year. The ZIRP madness nearly went on a generation.