Stocks Soar While Services PMI Weakens

Non-Manufacturing ISM Weakens

I’ve reviewed a few reports this week which saw moderate sequential weakness, but overall strength. The non-manufacturing PMI was one of the weakest reports of the bunch as the report makes me question why stocks are near their record high. It was a big miss as the PMI was expected to be 58.8 and it came in at only 55.7. That was below the lowest estimate which was 57.9. The prior report had a PMI of 59.1 which was very strong. This was the weakest reading since August 2017 which had a PMI of 55.2. This PMI is equivalent to 2.5% GDP growth. Either the soft data ISM report has become pessimistic or the economy is actually slowing. This is the exact report you’d expect if you’re following the ECRI’s prediction that growth will slow. To be clear, the ECRI growth rate improved slightly to 1% in its most recent report.

Since the report had a big gap lower, there were many indexes within it which fell sharply. The business activity index fell 7.4 points to 56.5. The new orders index fell 6.2 points from 63.2 to 57. The backlog of new orders index fell 5 points to 51.5. The prices index actually rose 2.7 points to 63.4. That’s disconcerting as prices rising and growth falling are the early warning signs of stagflation. I’m not saying that trend will play out, but I am saying this wasn’t a good report.

Let’s look at the quotes from this report to better understand why it was weak. Most of the quotes are positive even though the PMI fell 3.4 points. I’ll focus on the negative ones to show why it fell. A retail trade company said “Business is up overall, but a lot of questions loom over the rest of the year. These include concerns about international markets and the increasing tariffs that impact the landed costs of goods.” It seems like tariffs are hurting sentiment. If the current tariffs, which are relatively small, can hurt sentiment this much, the PMI can easily fall below 50 in the next few months as tariffs are raised further.

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