US PMIs Show the Fed Walking a Fine LineJanuary 25, 2023
The US Purchasing Managers Composite Index (PMI) increased in January to 46.6 from 45 in December, representing a slowing economy but slightly less pessimistic than expected and better than the month before. As a preliminary release for January, this US PMI report gives investors the most up-to-date statistic on how the US economy is doing ahead of Thursday’s advance release of GDP figures. This negative print is consistent with previous data releases this month that showed a slowing economy, namely the steep drop in ISM Services PMI on January 6 and the decline in ISM Manufacturing on January 4.
A slight uptick in the survey took place in January, but the composite, as well as the services and manufacturing segments are still under the crucial 50 level, representing a slowing economy, consistent with other recent indicators and reports like last week’s Beige Book that saw overall a slowing economy, but not necessarily a recessionary one.
The first thing to notice about this next table is that the majority of components that make up the headline figures are worse than in the first half of 2022. This corresponds to the Fed’s rapid interest rate rise, and high rates of inflation experienced in the middle of 2022, which have both led to a slowing real economy. Troublingly, input prices are staying stubbornly high. Encouragingly, future output appears to be improving.
While the composite and services measures are helpful to give a broader indication of how the economy is doing, the manufacturing segment is the statistic that gets the most attention because of the historic importance of manufacturing as a leading indicator of economic activity and because it’s a longer running time series.
Diving into the components of the manufacturing segment tells a more complete story about the two crucial aspects of the economy that the Federal Reserve seeks to address with its decision at the FOMC meeting next week: full employment (growth) and price stability (inflation).
Here, the detailed manufacturing components potentially gives us some insight into the economy. As we can see, new orders ticked up slightly, but remain solidly below 50 at 43.9. Output overall barely changed, while unemployment ticked town under 50%, representing a slowdown. But at the same time, future output has increased sequentially for three months now.
Crucially for the Fed, input prices increased from last month from 55.6 to 57.7, with more respondents saying they are experiencing higher input costs for manufacturing, a figure that was even higher for the services segment and composite measures, up to 63.7 from 58.7 for services. Output prices closely matched input prices at levels in the highs 50s as well.
Turning to services, employment in the services sector was still above the 50-level line representing an ever-so-slight expansion in hiring, with employment being below 50 in manufacturing. And again, future output is the highlight of the report, holding a level above 60 for three months now.
Prices came up slightly in January according to the PMI report, well above 50. Prices are staying high.
The data doesn’t paint a picture of a recessionary economy yet, but this report suggests the Fed is still walking a thin line between a soft landing and a recession.