The S&P, formerly Markit, reports Business Activity Declines at Slower Pace.

 US service providers signalled a much slower contraction in business activity during September, according to the latest PMI™ data. The fall in output was only marginal overall, as firms noted that improved demand conditions led to a weaker decline. New orders returned to growth, with domestic sales supporting the upturn, as new export business fell further. The rate of job creation softened to the slowest in 2022 to date, however, as challenges finding and retaining staff persisted. Labor and input shortages sparked a renewed rise in backlogs of work. Hopes of greater client demand, a peaking of inflation and investment in new products drove business expectations for the year-ahead to the highest for four months.  

 The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 49.3 in September, up from 43.7 in August, and broadly in line with the earlier released 'flash' estimate of 49.2. The latest data indicated only a slight contraction in US service sector business activity, and the slowest in the current three-month sequence of decline. That said, September data rounded off the second worst performing quarter for the sector since data collection began in 2009.  

Please note that we tend not to see three quarters of declining services activity except in recession. 

Chris Williamson, Chief Business Economist at S&P, Comments (Emphasis Mine)

•  "With service sector activity declining for a third straight month in September, businesses have faced a tough third quarter. Economic growth has come under pressure from falling output in both the manufacturing and service sectors, though in both cases September has seen some encouraging signals that business conditions may be starting to improve. 
• "Driving this improvement is a cooling of inflationary pressures in manufacturing supply chains, which is in turn alleviating cost growth for goods and energy in both manufacturing and service sectors, helping stimulate demand and allaying some concerns about the economic outlook. 
• "The worry is that tightening financial conditions, and notably higher borrowing costs, are exerting increased cost pressures on households and businesses, as well as hitting growth in the vast financial services sector, which has seen the steepest downturns in both demand and business activity in recent months and saw yet another marked worsening of business conditions in September.
• "Furthermore, despite easing, inflationary pressures in terms of firms' costs and average selling prices for goods and services remain elevated. With companies also reporting staffing issues and rising wages due to very tight labor market conditions, persistent inflation remains a concern at the same time that the economy appears to be struggling to regain momentum."  

Mild Stagflation Is Underway

Here's a three-word synopsis of Williamson's comments: Mild Stagflation Underway

ISM Services 

(Click on image to enlarge)

ISM table courtesy of ISM, by Permission 

Comparison to ISM 

• ISM: 28 months of rising services activity
• S&P: 3 months of contraction and worst quarter since 2009

The discrepancy between ISM and S&P for the same idea would be startling except for the fact it happens nearly every month.

Earlier today I reported ISM Services Remain Strong in August But Comments Tell a Different Story

It's easy to latch on to numbers you believe, but weakening data and anecdotes suggest S&P has things correct, not ISM. 

What About Labor?

The one point of commonality between the reports pertains to labor shortages.

• S&P Report: The rate of job creation softened to the slowest in 2022 to date, however, as challenges finding and retaining staff persisted. Labor and input shortages sparked a renewed rise in backlogs of work.
• ISM Correspondent Anecdote #1: Labor pressures continue to depress business activity, as insufficient staffing levels are not allowing the hospital system to operate at capacity. 
• ISM Correspondent Anecdote #2: Hiring continues to be a challenge across most industry sectors. There are far more open roles than candidates to fill them. Due to inflationary concerns, companies are being cautious about hiring direct employees and are attempting to utilize contingent labor. 

My key takeaway from the ISM report was "Things are slowing but there are staff shortages anyway."

The S&P report is consistent with what I have been expecting all year.

Why I Expect a Minimal Rise in Unemployment This Recession

Labor shortages match the BLS job reports. And as I have noted, there are over 22 million people age 60 or over, at or near retirement age, as of January.

I will take another look at the data for an update. But the comments match my July post Why I Expect a Minimal Rise in Unemployment This Recession

Also consider my July post Expect a Long But Shallow Recession With Minimal Job Losses

2020 was very short and unprecedented steep. 2022 will be the opposite, perhaps unprecedented shallow from an unemployment standpoint.

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