US PMI data signals better days ahead for the US stock market investors?

Tracking the PMI from now on will be an important indicator of how US businesses are responding to the Fed’s rate hikes.

US PMI data signals better days ahead for the US stock market investors?
US private sector businesses had a less severe decline in output during September.

The latest PMI data shows that the activity contractions in the manufacturing and service sectors slowed. Overall, there was just a slight dip, which indicated a significantly slower pace of decline than what was observed in August. According to S&P Global’s most recent flash PMI statistics, US private sector businesses had a less severe decline in output during September. Tracking the PMI from now on will be an important indicator of how US businesses are responding to the Fed’s rate hikes.

The headline Flash US PMI Composite Output Index registered 49.3 in September, up from 44.6 in August, to signal a softer and only marginal decline in private sector business activity. The decrease was also the slowest in the current three-month sequence of contraction. Although manufacturers continued to register a slight fall in production, service providers signaled a much slower pace of decline in output.

“September Flash PMIs came in above expectations. The manufacturing segment came in at 51.8, up from 51.5 in August and hotter than the consensus forecast of a decline to 51.1. The services segment came in at 49.2, up from 43.7 in August and also hotter than the consensus forecast of a more modest increase to 45. The manufacturing sector remained in expansion territory, defined by reading above 50. Even though the services segment improved significantly, it remains in contraction territory, defined by reading below 50.” says José Torres, Senior Economist, Interactive Brokers.

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S&P Global creates the US PMI (Purchasing Managers’ Index), which is based on original survey information gathered from a representative panel of about 800 businesses located in the US manufacturing and service sectors. The flash estimate is intended to give a precise early indication of the final PMI statistics and is based on about 85% of all monthly survey responses.

New orders received by private sector firms returned to expansionary territory in September, with growth broad-based across the manufacturing and service sectors. The upturn was only mild, despite being the quickest since May.

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Employment across the private sector rose further in September, albeit at a softer pace than in August. The moderate upturn in workforce numbers reflected expansions in manufacturing and service sector staffing levels. The rate of job creation at goods producers was the sharpest for six months amid greater success in hiring suitable candidates for vacancies

At the end of the third quarter, businesses in the private sector had more optimistic predictions for output over the following 12 months. The confidence level increased to a four-month high while remaining just below the series trend. An increase in optimism was associated with expectations of further increases in new orders and customer growth. Service providers reported a more positive attitude, whilst manufacturers reported a little easing in expectations.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “US businesses are reporting a third consecutive monthly fall in output during September, rounding off the weakest quarter for the economy since the global financial crisis if the pandemic lockdowns of early-2020 are excluded. However, while output declined in both manufacturing and services during September, in both cases the rate of contraction moderated compared to August, notably in services, with orders books returning to modest growth, allaying some concerns about the depth of the current downturn.

“There was also better news on inflation, with supplier shortages easing to the lowest since October 2020, helping take some of the pressure off raw material prices. These improved supply chains, accompanied by the marked softening of demand since earlier in the year, helped cool overall the rate of inflation of both firms’ costs and average selling prices for goods and services to the lowest since early-2021,” added Williamson.

But, will the latest PMI data impact Fed’s call on future rate hikes? “This report is not inflation friendly and puts pressure on the Fed to remain hawkish. The Fed wants to see less demand, not more. They also want to see workers rush back to work to alleviate wage pressures and avoid a wage-price spiral that could lead to higher inflation expectations. More workers also help production, which is deflationary on the supply side. More supply can offset high demand and cool prices as consumers have a wider market of goods and services to bid on. As the Fed continues to raise rates and tighten financial conditions, I suspect that labor shortages will ease further and price pressures will cool against the backdrop of dwindling demand. For now, the Fed still has a lot of work to do,” says Torres.

“Inflation pressures nevertheless remain elevated by historical standards and, with business activity in decline, the surveys continue to paint a broad picture of an economy struggling in a stagflationary environment,” echoes Williamson.

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