US PMIs Tumble To 4-Month Lows, Signal Just 2% GDP Growth

After reassuringly positive Eurozone PMIs, US Manufacturing and Services disapointed with the composite PMI slumping to 5-month lows in November.

• Flash U.S. Composite Output Index at 54.6 (55.2 in October). 4-month low.

• Flash U.S. Services Business Activity Index at 54.7 (55.3 in October). 4-month low.


• Flash U.S. Manufacturing PMI at 53.8 (54.6 in October). 2-month low.


• Flash U.S. Manufacturing Output Index at 54.3 (54.6 in October). 2-month low.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“US businesses reported another month of solid growth in November, putting the economy on course for a reasonable, though by no means stellar, fourth quarter.

 

Current PMI readings are broadly consistent with GDP growing at an annualised rate of just over 2%.

 

 

“There was also good news on hiring, with a slight uptick in employment growth meaning the surveys are indicating non-farm payroll growth of just over 200,000 in November.

 

“Both input costs and selling price inflation picked up, suggesting the upturn is feeding though to higher price pressures, though some of the manufacturing price hikes were attributable to the short-term effects of the hurricane-related supply chain disruptions.

 

“An upturn in new order inflows means we can expect a strong end to the year, though prospects for 2018 remain more mixed. Although expectations about the year ahead slipped lower in the service sector, future optimism hit a two-year high in manufacturing, suggesting the goods-producing sector may start to make a stronger contribution to the economy in coming months.”

India's Economy Crashes After "Mind-Bogglingly Inane" Tax System Strikes Back

With just a hint of schadenfreude, we note that, following our discussion of "how to destroy an economy", India"s Composite PMI collapsed to 46.0 in July - its lowest on record (well below the kneejerk lows after demonetization in November) as the "mind-bogglingly inane" new tax system and demonetization efforts continue to crush the poor and feed the wealthy.

As Goldman Sachs notes India"s Nikkei Markit services PMI contracted in July after reaching a 8-month high in June, following a decline of manufacturing PMI on Tuesday. The fall was led by a significant decline in new business, suggesting a worsened business sentiment after the GST implementation on July 1.

Main points:

• India"s Nikkei Markit services PMI contracted to 45.9 (the lowest reading since September 2013). Combined with the manufacturing PMI reported on Tuesday, the July composite PMI fell to 46.0, the lowest reading since March 2009.


• Among subcomponents, the new business index fell the most to 45.2 (from 53.3 in June), reflecting disruptions caused by the GST.


• As the press release from Markit Economics mentioned, “Most of the contraction was attributed to the implementation of the goods & services tax and the confusion it caused".


• The employment index for services fell to 48.9 (from 51.8 in June).


• That said, the index for business expectations rose to a 11-month high to 62.3, suggesting optimism from services providers about the future once they have more clarity about the new tax system.


• The output price index rose to 54.6 (from 51.0 in June), while the input price index moderated to 51.7.


• Overall, PMI data for July suggest a significant drag on new business activity post the GST implementation. That said, optimism expressed by both manufacturers and services providers about the future is encouraging and suggest a potential improvement in activity once businesses adjust to the new tax system.

From 8-month highs to record lows... why does any one put any faith in the useless "soft" surveys?

But expect more of this insanity to come, as one Indian businessman told us...

Given that the incumbent government has been winning elections despite steps like demonetization and the opposition is in complete disarray (Modi is a great orator), they have been emboldened to introduce measures that would be viewed as draconian by normal standards.

In this context, I have to mention Modi has been able to mesmerize voters to an extent that he can make even pain appear as something that is pleasurable and he has been able to conquer state after state and has an invincible aura about him now.

Such acts always bring Goebbels to my mind.

China PMIs Unexpectedly Accelerate Despite Ongoing Employment Contraction

Validating the recent surge in iron ore, which has jumped more than 18% from 2017 lows hit just two weeks ago on speculation the PBOC may be willing to flirt with another round of inflation, overnight Beijing reported an unexpectedly strong bounce in its manufacturing and service sectors. 

China’s NBS June manufacturing PMI came in at 51.7 for June, above both the previous reading of 51.2 and expectations of a 51 print, remaining comfortably above the 50-point expansion line. This was the second highest level of 2017, on the back of improving market sentiment and industrial upgrading, according to an NBS statement posted on its website, despite an ongoing troubling contraction in the employment subindex. Unlike the Caixin PMI, the official index tracks mostly larger, state-owned enterprises.

Two key sub-indices both increased from the previous month, although ominously the employment index declined for one more month and remained in contraction territory:

• The production sub-index went up to 54.4 in June, higher than 53.4 in May.


• The new order sub-index also increased to 53.1 in June from 52.3 in May.


• The employment index slightly declined to 49.0 in June, from 49.4 in May.

Both inflation indicators were higher, as the input prices index rose to 50.4 from 49.5 in May, and the output price index rebounded to 49.1 from 47.6 in May after three consecutive months of decline. Trade indicators were stronger: Both the new export order index and the import index increased by more than 1.0 pt, reaching 52.0 and 51.2 respectively. Raw material inventory inched up (to 48.6 vs. 48.5 in May) but finished goods inventory declined (to 46.3 vs. 46.6 in May). The suppliers" delivery times suggested longer delivery times (which imply better demand conditions) - it fell for a third consecutive month in June, from 50.2 in May to 49.9.

"Stronger foreign demand is helping to support manufacturing activity," Capital Economics" Julian Evans-Pritchard wrote. "The price components both increased for the first time since December, suggesting that downward pressure on producer prices may now be easing."

Separately, the official non-manufacturing PMI (comprised of the service and construction sectors at roughly 80%/20% weights) also surprised to the upside, rising to 54.9 in June from 54.5 in May. Services PMI rose to 53.8 from 53.5 in May, while construction PMI climbed to 61.4 from 60.4 in May.

The stronger than expected numbers "mean that momentum in the economy continues to be robust and we’ll have only a gradual slowdown at worst in the coming quarters," Dariusz Kowalczyk of Credit Agricole in Hong Kong, said in a Bloomberg Television interview. "China is doing very well."

As Bloomberg notes, economic activity this year has so far proven more resilient than expected - likely on the heels of the loan explosion at the start of the year which has since been tapered alongside China"s shadow banking crunch - giving policy makers time to focus on reining in financial risks and cooling a frothy property sector. Firmer global trade is boosting corporate profits and hiring, easing fears - for now - that efforts to cut excessive financial borrowing could derail the government’s target of 6.5% expansion in output.

Companies are assuming that curbs on excess leverage and the property sector will be transient this year, as the Communist Party won’t allow much economic pain before the leadership transition in the fall, according to a report published by research firm CBB International this week.

Goldman adds that judging from the NBS PMIs, June activity growth appeared to be healthy, however it adds that one caveat is that China’s mfg PMI trends seem to be at least slightly distorted by prices - thus the increase in output prices in June might have flattered somewhat the pickup in the headline PMI reading.

The Caixin manufacturing PMI release next Monday will give another early gauge of activity momentum in June.

US Services Economy Hits 15-Month Highs And 5-Month Lows: "Companies Are Becoming More Cautious"

Markit"s Services PMI tumbled to 5-month lows in February (down to 53.8) - erasing the post-Trump-bounce - as rates of expansion in activity, new work and employment all eased. The February drop in PMI is the largest in a year as Markit warns that "business optimism has mellowed.. and companies are becoming more cautious."

Of course that is the absolute opposite of what ISM Services reports - surging higher to a 15-month high at 57.6 (well above expectations)

ISM breakdown shows output and employment all rising faster - the exact opposite of Markit"s PMI data.

With a solid bounce in new orders - the opposite of what PMI data showed.

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“Taken together, the PMI survey readings for the first two months of the year suggest the economy is growing in the first quarter at a respectable annualised rate approaching 2.5%.

“The burning question is whether the February slowdown merely represents some pay-back after a strong start to the year for US businesses, or whether it’s the start of a more entrenched slowdown.

“A warning clue rests with the business expectations index, which indicates that business optimism has mellowed back to its pre-election level, suggesting that companies are becoming more cautious with regard to spending and hiring.

“However, companies continue to report buoyant domestic demand, especially from consumers, and continue to take on staff in reasonable numbers, the rate of hiring having slowed only modestly. The February survey is broadly consistent with 175,000 payroll jobs being added, which represents a pace of hiring that will do little to deter the Fed from delaying its next rate hike.”

The overall composite PMI (Services plus Manufacturing) dropped to its lowest since September.

Stagflation Shock: ISM Shows Input Costs Soaring At Fastest Since 2011

Input cost inflation is soaring at its highest since September 2014 according to Markit"s US Manufacturing PMI survey (which surged in January to 55.0 - slightly less than the 55.1 prelim print - the highest since March 2015). New orders accelerated but employment slipped and despite the surge in costs, factory gate charges increased only modestly. Despite disappointing "hard" data from durable goods, ISM survey data confirms the bounce (highest since 2014) but Prices Paid spiked to its highest since 2011 (and export orders dropped).

Hard vs Soft data... ISM CEO Holcomb summed it all up perfectly: ISM GAIN DRIVEN BY HOPES, EXPECTATIONS UNDER TRUMP

Prices Paid are soaring... (and export orders dropping)

ISM notes that...

• Commodities Down in Price: None.


• Commodities in Short Supply: None.

So, to be clear, everything is up in price, but there is no shortage of anything.

New Orders were stagnant...

And the full breakdown...

Almost every ISM respondent is exuberant...

• 
  

  “Demand very steady to start the year.” (Chemical Products)

  
  


• 
  

  “January revenue target slightly lower following a big December shipment month.” (Computer & Electronic Products)

  
  


• 
  

  “Strong start to the new year. Production is increasing and we are adding capacity.” (Plastics & Rubber Products)

  
  


• 
  

  “Business looks stronger moving into the first quarter of 2017.” (Primary Metals)

  
  


• 
  

  “Economic outlook remains stable and no current effects of geopolitical changes appear to be penetrating market conditions.” (Food, Beverage & Tobacco Products)

  
  


• 
  

  “Sales bookings are exceeding expectations. We are starting to see supply shortages in hot rolled steel due to the curtailment of imports.” (Machinery)

  
  


• 
  

  “Year starting on pace with Q4 2016.” (Transportation Equipment)

  
  


• 
  

  “Business conditions are good, demand is generally increasing.” (Miscellaneous Manufacturing)

  
  


• 
  

  “Conditions and outlook remain positive. Raw material prices are stable resulting in stable margins. Asset utilization remains high.” (Petroleum & Coal Products)

  
  


• 
  

  “Steady demand from automotive.” (Fabricated Metal Products)

  
  

Commenting on the final PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“The US manufacturing sector has started 2017 with strong momentum. Despite exports being subdued by the strong dollar, order books are growing at the fastest pace for over two years on the back of improved domestic demand.

“With optimism about the year ahead at the highest since last March, the outlook has also brightened.

“Production is consequently growing at the strongest rate for almost two years and inventories are rising at a rate not seen for nearly a decade as firms respond to higher demand, suggesting the goods-producing sector will make a decent contribution to first quarter GDP.

“With input costs also rising at the steepest rate for over two years, and hiring sustained at an encouragingly solid pace as firms expand capacity, all of the survey indicators point to the Fed hiking interest rates again soon.”