The U.S. economy is declining at a pace not seen since the 2008–2009 financial crisis, said Chris Williamson, the chief business economist at S&P Global Market Intelligence, citing the latest round of purchasing managers’ index (PMI) readings.
The S&P Global U.S. Manufacturing PMI eased to a two-year low of 52.3 in July, down from 52.7 in June—anything above 50 indicates expansion. The market had penciled in a reading of 52.
This month, production levels were flat, new orders fell, cost inflation slowed, employment growth moderated, and business sentiment plummeted to its lowest level since October 2020. More firms noted that they plan to cut personnel and slash costs.
In addition, the S&P Global U.S. Composite PMI plunged to 47.5 in July, down from 52.3 a month ago.
The services PMI fell short of the market estimate, with a reading of 47, down from 52.7. This was the biggest decline since May 2020, driven by a decrease in new exports, a drop in job creation, a jump in prices, and business confidence at its lowest level since September 2020.
PMIs are crucial economic indicators since they can suggest a general direction of trends in the manufacturing and service sectors.
“The U.S. #economy is contracting at a rate not seen since the global financial crisis in 2009 (excluding the initial pandemic lockdown), as the flash #PMI covering output of manufacturing and services fell sharply in July,” Williamson posted on Twitter.
Worse to Come?
Williamson noted that multiple forward-looking indicators, including the orders-inventory ratio signal, suggest that “worse is to come for U.S. manufacturing in August.
“This means the #FOMC is hiking interest rates at a time when the U.S. economy is already showing severe signs of stress & recession risks have risen,” he added.
This week, the Federal Open Market Committee (FOMC) will be holding its two-day July policy meeting. The market widely expects the Federal Reserve to raise interest rates by 75 basis points for the second consecutive month, although there is a 20 percent chance of a 100-basis-point hike this month amid skyrocketing inflation, according to the CME FedWatch Tool.
While some market analysts think this will help trim headline inflation levels, they also fear that these efforts might facilitate a recession.
“As for next year, we strongly suspect rate cuts will be the key theme,” wrote ING economists in a research note. “By delaying their response to high inflation and now having to move policy faster and deeper into restrictive territory, there is clearly the fear of a recession. At the same time, we think inflation could fall sharply from March next year onwards.”
Speaking in an interview with CNBC, top economist Mohamed El-Erian purported that inflation has likely peaked, but it might be at the expense of the economy.
“I think inflation has peaked in the U.S., at least for the next three to four months. We’ve got to see how sticky some elements are,” he said on Friday. “But the problem is not that inflation is going to come down—that’s a really good thing. The problem is that inflation is going to come down with growth probably going into a recession, and that’s not good news.”
Concerns over an economic downturn have dramatically increased over the last month.
In addition to a higher-than-expected 9.1 percent consumer price index (CPI) in June, a broad array of metrics released this month have indicated a slowing economy
Personal spending eased to a 0.2 percent increase month-over-month, while personal income was unchanged at 0.5 percent increase. The Institute of Supply Management’s (ISM) Manufacturing PMI fell to 53, construction spending tumbled 0.1 percent, industrial production fell 0.2 percent, and manufacturing output dropped 0.5 percent.
Sentiments and expectations have also deteriorated among companies and consumers.
The National Federation of Independent Business (NFIB) Optimism Index slipped to 89.5 (100 was sentiment in 1986), the IBD/TIPP Economic Optimism Index in the U.S. remained at an 11-year low, and the Conference Board’s Consumer Confidence Index tumbled to 98.7 (100 was sentiment in 1985).
Despite the strong June jobs report, there have been signs that the labor market could be showing sluggish signs, too.
The number of Americans filing new claims for jobless benefits rose to a nine-month high of 251,000 in the week ending July 16, according to the Bureau of Labor Statistics (pdf). The four-week average, which removes week-to-week volatility, has steadily climbed every week since the beginning of April.
Job openings and quits took a breather in May, while job cuts swelled in June.
Is the US in a Recession?
In the meantime, all eyes will be on the second-quarter GDP report to determine if the U.S. has slipped into a technical recession. The market consensus is a growth rate of 0.4 percent, while the Bloomberg GDP estimate range from 55 economists is between -0.6 percent and 1.2 percent. But the Atlanta Fed Bank’s GDPNow model estimate shows -1.6 percent in the April-to-June period.
Many organizations have lowered their GDP forecasts for the next few years. S&P Global’s latest projections show 0 percent in 2022, -0.4 percent in 2023, -0.2 percent in 2024, and -0.2 percent in 2025. The Conference Board downgraded its second-quarter expectation from 1.9 percent to 0.8 percent. For 2022, the Conference Board anticipates 1.7 percent expansion and 0.5 percent growth next year.
But until there is considerable weakness in the labor market, the Fed’s tightening cycle will function on auto-pilot, says Scott Anderson, the chief economist at Bank of the West Economics.
“It feels a bit like one of those bad horror movies where the creepy music is already playing, but the character continues to walk into the seemingly abandoned house,” he wrote in a note. “You know this isn’t going to end well though you’re not yet sure what is about to happen.”
According to the Fed’s Summary of Economic Projections that was updated from March, the median unemployment rate forecasts were raised to 3.7 percent in 2022, 3.9 percent in 2023, and 4.1 percent in 2024 (pdf).
From The Epoch Times