Business Optimism At A 6 Month Low?

Weakening PMI Services Index

After reviewing the non-manufacturing ISM report, you must be wondering about the stability of this recovery. Is it possible that the services index is signaling a slowdown in the 2nd half of the year? Reviewing the July Markit services report will help us find out if the ISM was a fluke or a signal of a greater trend. The Markit PMI was 56.0 which missed estimates for 56.3 and was below the prior report of 56.5. This report showed economic growth is weakening (going from great to good growth).

Growth in incoming orders fell in the second half of July, ending the month at the slowest growth rate since early in the year. Business optimism for the next 12 months fell to a 6 month low because of worries about tariffs affecting demand. Backlogs fell for the first time in over one year.

Some investors are willing to ignore any weakness in economic data related to tariffs because much of it is fear about a future trade war, not a summary of the effects that are happening now. It’s easy to sleep on the worries about tariffs with the stock market near a record high. Personally, I get worried when risks increase along with stock prices. When you combine the services report in the 2nd half of the month with manufacturing, the Markit PMI composite for July is 55.7 which is down from 56.2 in June. That is a 3 month low.

The weakening seen in the Markit and ISM reports is the worst possible situation in rate of change terms. To be clear, there were good aspects to this report. I have higher standards for the economy when the stock market is roaring and showing signs of froth. Reviewing the good in this report, the decline in order growth could be a blessing because the economy may have reached capacity constraints. Business activity is near its strongest level in 3 years. Employment is limited by the lack of skilled workers which should drive up their wages. Because output capacity was less constrained, input price inflation eased; however, selling prices are still almost at a 4 year high. This means the consumer is being hit with higher prices which could hurt demand.

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