August Services PMIs Add to Risk of an August Jobs Report Miss
Here are the implications, as the services sector should continue to carry the overall economy.
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With our pickup of more shares of Applied Materials AMAT and upgrade of Morgan Stanley MS to a One rating, let’s recap Thursday's August Services PMI reports and discuss what they mean for Friday's August Employment Report and the economy.
ISM’s August Services PMI Report
Let's start with ISM’s data primarily because it factors into most GDP equations. The headline figure for the August Services PMI data inched ahead to 51.5, from 51.4, which we would characterize as only a modest improvement. New orders rose at a nicer pace, hitting their highest level since May, which is partially explained by the steep drop in backlog of orders. The Employment sub-index fell to 50.2, a hair’s breadth away from the expansion-contraction line at 50, but still higher than the 46.1-47.1 range from May and June.
When paired with the August Manufacturing PMI, because the services economy in the U.S. drives roughly three-quarters of its GDO, the above figures point to a slowing economy, not one that is falling off a cliff. The employment reading in the August Services PMI is also one that will catch the Fed’s eye given its renewed emphasis on its dual focus between inflation and employment.
The would-be fly in the ointment in ISM’s Services PMI data for August is the step up in the Price sub-index to a reading of 57.3. That is up from 57.0 in July and 56.3 in June — not the direction the Fed wants to see in the closely watched services sector.
S&P Global’s Final August Services PMI Report
Turning to S&P’s Services PMI report, it showed that part of the economy grew at a brisker pace in August, with its headline figure reaching 55.7 vs. 55.0 in July. That was the most pronounced improvement dating back to March 2022.
New orders strengthened in this report as well but so did output costs, although those were offset by a growing use of discounting to attract customers. Input costs also continued to rise, and the tension between those two metrics means we will continue to focus on margin prospects as we move through the wave of September investor conferences.
S&P’s report also found employment decreased for the month, and we see that as another indication the August Employment Report could disappoint.
Implications and Conclusions
From time-to-time findings from ISM and S&P Global can conflict, but in the case of their August Services PMIs, they both show the services part of the economy growing at a faster pace than the last few months. Strength in new order growth says that’s likely to continue and the odds of this part of the economy rolling over are low.
Companies are responding to consumer pushback on cumulative price hikes over the last several quarters and we should be mindful of margins as promotional activity may eat into them as well as bottom-line results. The silver lining for that is it should keep a lid on inflation data found in next week’s CPI report.
Factoring in both reports, the ADP August Employment Change Report, and the August Challenger Job Cuts Report, it is foreshadowing a potential miss in Friday's jobs numbers. Despite this, the market consensus still stands at 160,000 non-farm jobs, up from 114,000 in July. Our view is that a weaker-than-expected jobs print Friday will support the Fed potentially delivering more than two rate cuts this year.
If the print is a disaster, as in below 50,000 jobs being created, it would mark a dramatic slowdown and foster concerns about the economy. While this would lead to calls for the Fed to do much more, it would also be a reason for market volatility to continue as we close out the week. If we had to assign a probability to this scenario playing out, it would be a low one. Fortunately, we’ve built up our cash position so if it does happen, we have room to be opportunistic.
