ISM services exports fell a whopping 17.4 percentage points and employment is also in contraction, but prices are still increasing.

ISM table and comments by permission, highlights by Mish

Please consider the October 2022 Services ISM^® Report On Business^®

Key Points 

• In October, the Services PMI® registered 54.4 percent, 2.3 percentage points lower than September’s reading of 56.7 percent. This is the lowest reading since May 2020, when the index registered 45.2 percent. 
• The Business Activity Index registered 55.7 percent, a decrease of 3.4 percentage points compared to the reading of 59.1 percent in September. 
• The New Orders Index figure of 56.5 percent is 4.1 percentage points lower than the September reading of 60.6 percent.
• After five straight months of decreases, the Prices Index was up 2 percentage points in October, to 70.7 percent. Services businesses still continue to struggle to replenish their stocks, as the Inventories Index contracted for the fifth consecutive month; the reading of 47.2 percent is up 3.1 percentage points from September’s figure of 44.1 percent. 
• The New Export Orders Index plunged 17.4 percentage points to 47.7.

What Respondents Are Saying (Emphasis Mine)

• “Despite the negative inflation news, higher gas prices, and concerns of a recession, our restaurant sales have been resilient during what is typically a seasonal slump. We are positive to 2019 (pre-coronavirus pandemic), and traffic is down only about 4 percent, so it’s recovering. Staffing and supply chain challenges are improving, (and we are) seeing some decline in key commodities.” [Accommodation & Food Services]
• “Business remains tepid. We have a general concern that sales volumes are trending down as buyers communicate that they’re planning to buy only what they need for immediate sales.” [Agriculture, Forestry, Fishing & Hunting]
• “Customers are starting to delay projects and/or entering smaller-scale scopes of work. We believe this is a continuation of an uncertain economic environment.” [Construction]
• “There are supply chain challenges for some paper- and tech-related products.” [Educational Services]
• “Shortages and delays stabilizing. Labor availability and patient volume continue to be a challenge.” [Health Care & Social Assistance]
• “Electronic components lead times are becoming longer, pushing out almost a year. Not seeing much change in pricing based on inflation pressures at this point, but we expect to see changes after the first of the year. Business volume remains strong.” [Other Services]
• “As we prepare for a recession, our stakeholders, clients, and vendors are all tightening their belts and reducing new spend. We are focusing on strategic renewals and expanding only where necessary with our closest vendor partners for our most critical tech projects.” [Professional, Scientific & Technical Services]
• “Prices seem to continue increasing for commodities, including plumbing, flooring materials, floor adhesives, door locks, and bedroom and bathroom doors. Delays in delivery have increased after leveling off in the middle of the year.” [Real Estate, Rental & Leasing]
• “We are in the final preparations for a successful holiday, despite lower sales. Labor is more available this year, and supply chain delays seem caught up for now.” [Retail Trade]
• “It has become more challenging to maintain our level of service, due to increased demand, extended supplier lead times, and the hyper-competitive employment market.” [Transportation & Warehousing]
• “We are experiencing a bullwhip of oversupply on some goods … while still desperately short on other goods. The market is recovering very inconsistently.” [Wholesale Trade]

Global Point of View

Based on a crash in new export orders, the global economy is rapidly plunging into a strong recession even if the US is relatively immune. 

Fed Point of View 

The comments run the gamut from preparing for a recession to preparing for a successful holiday. 

The Fed will be pleased with slowing services, even employment, but certainly not price increases or goods shortages.

Premature to Think About Pausing Interest Rate Hikes

Yesterday, at the post-FOMC news conference, Powell stated "It's premature to think about pausing interest rate hikes."

Powell also explicitly commented on services inflation, and the fact that inflation in goods has been more resistant than it expected.

Regarding national rent prices: "Still significant inflation in rent pipeline."

Powell's statement supports my position discussing new vs existing leases:https://t.co/bgpRv7rvhr pic.twitter.com/f3UUBvONLW

— Mike "Mish" Shedlock (@MishGEA) November 2, 2022

Soft Landing Thesis In Doubt

It's hard to say what soft landing even means. Is a long period of below trend growth a soft landing?

Powell mentioned jobs in his reply.

On that score, I agree with Powell that this recession will not see unemployment rate rise as much as it does in a typical recession.

— Mike "Mish" Shedlock (@MishGEA) November 2, 2022

Soft Pivot Notes From Last Few Minutes of Video Conference

• Powell: "I want people to understand our commitment to getting this done. I control those messages and that's my job".
• Q: Has the window for a soft landing narrowed?
• Powell. "Has it narrowed? Yes. Is it still possible? Yes.
• Q: Why has it narrowed? Powell: "Because we haven't seen inflation coming down. To the extent, rates have to go higher and stay higher for longer it becomes harder to see the path. It's narrowed."
• Powell: "We would have expected to see by now, as the supply side problems have resolved themselves, we would have expected goods inflation coming down, by now, long since by now. And we really haven't, not to the extent that we hoped. At the same time, you now see services inflation, core services moving up.
• "The inflation picture has become more challenging over the course of this year, without a question. That narrows the path to a soft landing."

"Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. We will stay the course until the job is done," said Powell.

Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

I have noted this many times, but please recall my August 19, 2022 post Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

Powell confirmed my view yesterday. 

Also, see my discussion on rent: Rent Prices Have Declined Two Straight Months, But What Does It Mean?

 Powell also confirmed my take "Rent prices are declining month-over-month but don't read too much about inflation into the decline."

So hike away until something breaks. That's when the Fed pivots. I cannot tell you when, but I suspect sooner rather than later.

Any other questions?

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