Got stagnation? Services sector slows, price pressures tick up

Goodbye, recession forecasts. Hello, stagnation?

This is the word on Wall Street today after the Institute for Supply Management (ISM) Services Purchasing Managers’ Index (PMI) slowed to 52.7 in July, down from 53.9 and below the consensus estimate of 53.

One notable component of the monthly print is that services employment plummeted to 50.7, down from 53.1 and under economists’ expectations of 51.1.

Moreover, services business activity eased, new orders fell, and prices picked up.

Ouch.

In addition, the S&P Global Services PMI also fell to 52.3 last month, down from 54.4 and below the market forecast of 52.4.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said in the report:

“The service sector remains the main engine of growth in the US economy, though there are signs of the motor spluttering amid rising headwinds. Business activity rose in July at the slowest rate since February, with the rate of expansion sliding further from May’s recent peak in response to sharply reduced growth of new business. Although spending from foreigners in the US continues to grow strongly as the post-pandemic travel surge shows signs of persisting, demand growth waned from domestic customers, often linked to the rising cost of living and higher interest rates. Reflecting concerns that the upturn is faltering, companies have become much less optimistic about the outlook and reined-in their hiring as a result.

“An additional concern is that prices charged for services rose at an accelerated rate in July, often linked to higher staff costs. Such a wage-led stickiness of inflation in the
vast service sector will naturally worry policymakers.

“With the weakening service sector expansion accompanied by a near-stalled manufacturing sector, the overall message from the surveys is that economic growth weakened at the start of the third quarter, cooling to an annualized rate of around 1.5%. The survey’s price gauges, however, continue to signal a stubbornness of inflation around the 3% mark.”

It might be a lagging indicator, but factory orders surged 2.3% in June, up from 0.4% in May, and higher than the market projection of 2.2%. However, factory orders ex-transportation rose at a lower-than-expected 0.2%.

Evidently, the economy is slowing to kick off the third quarter.

The Federal Reserve Bank of Atlanta’s GDPNow Model estimate should be revised a lot lower than the current 3.9% projection.

That said, slowing economic conditions, renewed inflation pressures, and soaring borrowing costs. This is a recipe for stagnation.

Now we shall see if the U.S. labor market took a breather last month.