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.
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.
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.
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.
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.
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.
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 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.
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.
“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.