The IHS Markit Purchasing Manager's Index (PMI) was posted this morning. The report is considered “soft data” because it is based on reports and interviews. It is also the preliminary report. The final version of the report comes out on August 2nd for the manufacturing portion and August 4th for the services and composite final.
The manufacturing side of their report posted another record high of 63.1. This beat expectations of 62.0 and was up from June's 62.1 mark. New orders rose as consumers opened their wallets. Foreign demand was up and production was up despite material shortages. Backlogs increased (second-fastest increase on record) though more job openings are being filled. Finally, the rate of inflation accelerated to a new high in the survey.
On the services side of the survey, the PMI dropped to 59.8 from 64.6 in the previous month's report. This underwhelmed expectations of 64.8. This is the third month in a row of declines in the services PMI and the lowest rate since February (a five-month low). Businesses struggled acquiring labor and shortages of stock. New business in the sector was down. Firms noted an increase in costs which caused some customer hesitancy.
The composite PMI index to fell to a 4-month low of 59.7. This is down from 63.7 in June. Output growth was the slowest in the past four months.
How do we balance a slowing of expansion on the services side of the economy with a very robust expansion on the manufacturing side? Something to keep in mind when reviewing “soft data” reports like the ISM or Markit survey is that anything above 50 is expansionary. Meaning even though the services report disappointed expectations, it is still in expansionary mode. Also, manufacturing jobs pay more. Workers are coming back to those jobs over the lower paying service sector jobs. This gives those manufacturers added optimism. Chris Williamson, the chief business economist at IHS Markit wrapped up the report with this quote, “Inflationary pressures and supply constraints – both in terms of labour and materials shortages - nevertheless remain major sources of uncertainty among businesses, as does the delta variant, all of which has pushed business optimism about the year ahead to the lowest seen so far this year. The concern is this drop in confidence could feed through to reduced spending, investment and hiring, adding to the possibility that growth could slow further in coming months.”
He points out that the three primary pressures weighting on businesses are inflation, labor and material shortages, and covid derangement syndrome. I find it curious that he put them in that order. For me, this continues to reinforce the idea that this is not “transitory” inflation.
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