ANALYSIS: Fresh Data Signal US Economy Facing ‘Stagnation’

A 'for sale' sign is displayed in front of a new home in a housing development as a maintenance worker sweeps the street in Fairfax, Va., on Aug. 22, 2023. Sales of homes in the United States ticked down in July, according to industry data released on Aug. 22, 2023, as elevated mortgage rates and limited housing supply held buyers back. Andrew Caballero-Reynolds/AFP via Getty Images

This summer, U.S. financial markets have largely dismissed recession fears, pointing to a treasure trove of data that depict the national economy in a positive light. But fresh figures indicate that the country could be facing a “stagnation” point.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI), a barometer of business activity in the manufacturing and services sectors, eased to 50.4 in August, down from 52 in July and below the consensus estimate of 52.

The S&P Global Manufacturing PMI deepened into contraction territory, coming in at 47 this month, down from 49 in July. The Services PMI also slipped from 52.3 to 51.

Total new orders tumbled, the pace of job creation slowed, input cost inflation re-accelerated, and business outlook improved, according to the S&P Global data.

“A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a report. “The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.”

Orders of major U.S. manufactured goods supported concerns that the economy could be grappling with a stagnating environment in the middle of the third quarter.

According to the Census Bureau, durable goods orders plunged by 5.2 percent in July, down from a downwardly revised 4.4 percent in June and worse than the market projection of negative 4 percent. The final print represented the sharpest drop since April 2020.

Orders for transport equipment crashed by 14.3 percent, while orders for nondefense capital goods, excluding aircraft, increased by 0.1 percent.

“On a more downbeat note, shipments of core capital goods orders – which are used to help estimate business investment spending in the GDP report – slid 1.1% in July, pointing to a sharp slowdown in business investment spending in the third quarter GDP report,” said Scott Anderson, chief economist at Bank of the West Economics.

All this is “pointing to U.S. economic activity softening to near stagnation in the middle of the third quarter,” Mr. Anderson added in a separate note.

Tightening Effects

Is the economy beginning to feel the effects of higher interest rates?

Since monetary policy functions with a lag, Fed officials and a chorus of economists warned that it could take time for the country to experience the climate of a 5 percent fed funds rate.

“The US economy is likely to experience a winter recession,” Carsten Brzeski, global head of macro at ING, wrote in a note.

Despite the disappointing data, the Atlanta Fed Bank’s GDPNow model estimate for the July-to-September period was revised up to 5.9 percent from 5.8 percent.

Next week, critical economic data monitored by the central bank will be released, including the personal consumption expenditure (PCE) price index and the August jobs report.

The Cleveland Fed Bank’s Inflation Nowcasting model suggests a 3.6 percent annual PCE and a 4 percent core PCE, which strips the volatile energy and food cycles. Meanwhile, early forecasts suggest the U.S. labor market created 180,000 new jobs.

While price inflation has drifted into a 3 percent to 4 percent territory, the Cleveland Fed’s Nowcast forecasts an uptick in the consumer price index (CPI) this month: 3.8 percent year-over-year and 0.8 percent month-over-month.

Treasury yields have also been soaring this month, indicating that investors expect a resuscitation in inflation. The 2-year Treasury yield is above 5 percent, while the benchmark 10-year yield is hovering around its highest level in 16 years at about 4.25 percent.

“The increase in market interest rates directly contrasts with market expectations that the Federal Reserve is close to the end of its tightening cycle,” John Lynch, the chief investment officer at Comerica Wealth Management, said in a note. “Rising real yields pose risks to economic and market activity, with the attendant spending, investment and valuation risks for consumers, businesses and investors.”

But it isn’t only renewed business and consumer prices that the Federal Reserve may need to worry about. New realities are beginning to seep into the world’s largest economy.

The Federal Reserve building in Washington on Sept. 19, 2017. Samira Bouaou/The Epoch Times

Recent research from the San Francisco Fed found that household pandemic-era excessive savings could be exhausted before the year is over.

Total credit card debt has exceeded $1 trillion for the first time on record.

The housing market is enduring a trifecta of challenges: sky-high mortgage rates, tumbling existing home sales, and below-trend new housing construction activity.

In addition, there are signs that the red-hot labor market is beginning to cool down.

“In July, weak new orders, high interest rates, a dip in consumer perceptions of the outlook for business conditions, and decreasing hours worked in manufacturing fueled the leading indicator’s 0.4 percent decline,” Justyna Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board, said in a report.

“The leading index continues to suggest that economic activity is likely to decelerate and descend into mild contraction in the months ahead.”

Jackson Hole

Fed Chair Jerome Powell will deliver a much-anticipated speech at the central bank’s annual Jackson Hole symposium on Aug. 25. Since becoming head of the institution, Mr. Powell has used the event as a way to advance policy agendas.

Market analysts don’t expect Mr. Powell to repeat the same pessimistic message as last year. Instead, there is an expectation that he will promise to finish the fight against inflation while also being cautious about not overtightening.

“With the inflation shock proving more persistent since then, and with some early signs that price pressures are moderating, this year’s conference is an appropriate setting to reset the Chair’s inflation views,” Deutsche Bank economists wrote in a note.

It will be “a balancing act” ahead of next month’s Federal Open Market Committee (FOMC) policy meeting, market analyst Gene Inger said in a daily note.

According to the CME FedWatch Tool, the futures market is pricing in an 80 percent chance of the Fed moving ahead with a rate pause.

“If Feds have an attitude of ‘we can get another hike in and get away with it,’ I will just say shame on the Fed, and I don’t think they can get away with that,” Mr. Inger wrote. “Personally, I think rates will be ‘on-hold’ at the next FOMC meeting; but it’s not all that unusual for the Fed to try to tame any expectations of ‘rate cutting.’”

The rate-setting committee will hold its next two-day policy meeting on Sept. 19 and 20.