Third quarter themes held steady with Services sector PMI growth, moderating consumer inflation and weak consumer sentiment. This week’s jobs report seems to be taking on increased weight in evaluating the Fed’s monetary path.
The August Personal Income and Outlays report from BEA (September 27) presented little variance from the earlier Consumer Price Index data. PCE in August increased 0.1% on both headline and core measures. Core PCE 1-year change was 2.7% which was an increase from the July reading of 2.6%. Next months measures should continue to improve as easy comparison months roll from both the 1-year and 6-month calculations. After that further improvements become more challenging.
The persistently high inflation in the Services sector is of particular concern. The nearby chart shows Goods PCE flattening mid-year 2022 after surging higher beginning in 2021. In contrast, Services PCE has maintained a steady rate of increase for nearly 4 years. Further progress towards the long-term 2% inflation rate may be difficult in the 4th quarter without significant further Labor market weakening.
S&P Global Flash September PMI data (September 23) continued the trend of Manufacturing sector decline more than offset by Service sector growth. The full report commentary is a worthwhile summary of current conditions.
“The early survey indicators for September point to an economy that continues to grow at a solid pace, albeit with a weakened manufacturing sector and intensifying political uncertainty acting as substantial headwinds. A reacceleration of inflation is meanwhile also signalled, suggesting the Fed cannot totally shift its focus away from its inflation target as it seeks to sustain the economic upturn.
“The sustained robust expansion of output signaled by the PMI in September is consistent with a healthy annualized rate of GDP growth of 2.2% in the third quarter. But there are some warning lights flashing, notably in terms of the dependence on the service sector for growth, as manufacturing remained in decline, and the worrying drop in business confidence.
“The survey’s price gauges meanwhile serve as a warning that, despite the PMI indicating a further deterioration of the hiring trend in September, the FOMC may need to move cautiously in implementing further rate cuts. Prices charged for goods and services are both rising at the fastest rates for six months, with input costs in the services sector – a major component of which is wages and salaries – rising at the fastest rate for a year.†The Conference Board September Consumer Confidence Index (September 24) fell sharply. The accompanying report noted, “Consumer confidence dropped in September to near the bottom of the narrow range that has prevailed over the past two years. September’s decline was the largest since August 2021 and all five components of the Index deteriorated. Consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further. Consumers were also more pessimistic about future labor market conditions and less positive about future business conditions and future income.â€