MACRO: US PMI indices in contraction mode

The S&P Global US Manufacturing PMI plunged to 49.9 in October from 52 in September, well below analysts’ estimates of 51 and marking the sector’s first contraction since June of 2020, according to Markit Economics.

• New orders shrank, signaling a renewed decline in demand with manufacturers highlighting the impact of high inflation and stock building from earlier in the year.

•  Stronger dollar also put pressure on export demand which declined at the quickest pace since May 2020.

• Manufacturing output was seen marginally higher, pressuring backlogs of work to fall for the first time in over two years.  Employment grew at a slower pace, while input costs accelerated after a four-month period of eased inflation, largely due to material shortages and higher wage bills. 

• Price pressure and expectations of higher interest rates drove the degree of confidence to be close to survey-lows.

The S&P Global US Services PMI fell to 46.6 in October from 49.3 in the previous month, and well below market estimates of 49.2, a preliminary estimate showed. The latest reading signaled the second-fastest fall in business activity in almost two-and-a-half years, due to weak client demand and the impact of inflation and higher interest rates.

• New business fell for the second time in the last three months, with new export orders declining sharply due to challenging economic conditions in key export markets. 

• Employment was down for the first time since June 2020, amid reports of non-replacement of voluntary leavers, alongside some reports of lay-offs. 

• Both input and output cost inflation rates accelerated, while business confidence fell to the weakest level since September 2020, as higher operating costs and client hesitancy weighed on optimism.

Both readings are currently below 50 level, which indicates a contraction in the private sector. Outside the slump during the first wave of the COVID-19 pandemic in the spring of 2020, business output is retreating at the swiftest pace since the 2007-2009 global financial crisis, by S&P Global's measure at least. Source: Bloomberg

In recent months we have observed similar declines, and then the ISM index showed the strength of the American economy. Nevertheless, today's data indicate that the US is heading into recession and higher interest rates are exerting pressure on the economy, which may be another argument for a potential smaller rate hike in December.