ISM table and synopsis by permission

Please consider the Services ISM^® Report On Business^® for August 2022.

“According to the Services PMI^®, 14 industries reported growth. The composite index indicated growth for the 27th consecutive month after a two-month contraction in April and May 2020. Growth continues — at a slightly faster rate — for the services sector, which has expanded for all but two of the last 151 months. The services sector had a slight uptick in growth for the month of August due to increases in business activity, new orders and employment. Based on comments from Business Survey Committee respondents, there are some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Employment improved slightly despite a restricted labor market.”

Business Activity Contracts at Sharpest Pace Since May 2020

For a completely different take, please consider the S&P Global US Services PMI™

Key Findings 

• Business activity contracts at sharpest pace since May 2020 amid solid fall in new orders
• Renewed decline in new orders drives faster fall in output.
• Rates of input cost and output charge inflation ease further.
• Employment growth slowest since January.

August survey data signaled a sharp and quicker decline in business activity across the US service sector, according to the latest PMI™ data. The decrease in output stemmed from weak domestic and foreign client demand, as new orders returned to contraction territory. At the same time, weak inflows of new business led firms to moderate their hiring activity. Employment rose at the softest rate since January as backlogs of work contracted at the fastest pace in over two years. Although the degree of optimism picked up to a three-month high, it was below the series average as concerns regarding the impact of price rises on demand weighed on expectations.  

Comments from Chris Williamson, Chief Business Economist at S&P Global Market

• "August saw the US economy slide into a steepening downturn, underscoring the rising risk of a deepening recession as households and business grapple with the rising cost of living and tightening financial conditions. 
• "Businesses are reporting a deterioration in output and order books of a degree exceeded since the global financial crisis only by that seen during the initial pandemic lockdowns. 
• "While orders are being lost across the board as a result of rising prices and the cost-of-living squeeze, the steepest downturn is being recorded in the financial services sector, reflecting the additional impact of higher interest rates and worsening financial conditions. 
• "Jobs growth has meanwhile cooled as companies grow increasingly reluctant to expand in the face of falling demand and an uncertain outlook, which will serve to further dampen growth in the coming months. 
• "One positive form the survey was a substantial fall in the rate of input cost inflation, which should help to moderate consumer price growth in the months ahead, albeit with the rate of increase remaining stubbornly elevated."  

Which to Believe?

Once again the question is very clear cut. The idea that the US economy is strengthening is ludicrous.

Heck, the entire global economy is headed for the gutter. 

The J.P.Morgan Global Composite PMI™ reports "Global economy contracts for first time since June 2020 despite further easing in cost inflation"

The title now reads "since 2022". I have informed them of the typo so it may be corrected if you read the link. 

Key Findings 

• US drops to bottom of national PMI rankings 
• Downturns signaled in all sectors except financial services 
• Signs of excess capacity as backlogs fall and jobs growth slows  

August saw global economic activity contract for the first time since June 2020, as new order inflows declined, international trade volumes fell and signs of excess capacity grew. There was better news on the price front, however, with rates of input cost and output charge inflation both easing.  

Recession Denial

People are free to believe whatever they want. And they will.

Those in the "jobs are too strong for there to be a recession camp" will no doubt look at ISM numbers just as they rely on GDI over GDP.

On an Income Basis the Economy is Humming

GDP and GDI data from the BEA, chart by Mish

On an income basis, the US economy is humming. 

Those who think we are not in recession place a lot of faith in GDI. But what is so believable about GDI?

The debate goes like this.

Recession Believers: Housing is crashing, real wages are declining, and real spending is at best stagnant. The yield curve is screaming recession. Target has warned three time, Walmart once, and the Fed is on a rate hike rampage.

Recession Disbelievers: Jobs are strong and so is GDI. 

This one is not even close, but people will believe what they want. Jobs are a lagging indicator, and due to massive losses in the Covid recession, I fully expected a minimal rise in unemployment this recession. 

Explaining the GDP to GDI Divergence

I have an explanation why GDI is overstated, and by a lot.

The short explanation is GDI has overstated wage growth. Other charts confirm this idea. 

Since March, the BLS reports that the sum of full and part time employment is down by 48,000 but jobs are up by 1.9 million. 

A likely explanation for the divergences is boomer retirements coupled with approximately 2 million people taking extra part time jobs to make ends meet due to high inflation.

For discussion, please see On an Income Basis the Economy is Humming, GDP says No, Which is Believable?

But despite the fact that all the pieces point to a GDI that's not happening, denial runs deep. 

Last Five Quarters of Real Final Sales

• 19,449
• 19,453
• 19,524
• 19,469
• 19,516

That's an entire year of stagnation. The whole recession debate is now silly.

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

On August 19, I commented Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

On August 26, at Jackson Hole, Fed Chair Jerome Powell Pledges to "Act With Resolve" to Beat Inflation

Key comments: "Reducing inflation is likely to require a sustained period of below-trend growth."

We have already had a year of very weak Real Final Sales growth (assuming there was any growth at all). Expect more weakness. 

Meanwhile, please note The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole.

Good luck with that. 

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