Flash October PMI Suggests a Goldilocks Economy
Let's review the report and how it might impact the Fed going forward.
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Yesterday we explained to you why we were waiting for this morning’s October Flash PMI and what it could mean for upcoming data as well as Fed rate-cut expectations.
Not only did the headline Flash PMI figure rise compared to September, but the composite print of 54.3 was a few ticks ahead of the consensus forecast. While the manufacturing economy continued to languish in contraction territory with a Flash October reading of 47.8, it was more than offset by further strength in the service sector. To give you an idea, over the last three months the service sector PMI averaged a reading of 55.3 compared to 55.0 for the May-July 2024 period, and 50.96 for the August-October 2023 one.
In terms of job creation in October and inflation, S&P’s data point to only a modest decline in payrolls compared to September, which you’ll recall surprised to the upside big time with the September Employment Report. It's no surprise to find the jobs data were largely influenced by the service sector and this is the first piece suggesting a sharp drop in the October Employment Report may not be what we find next week. Between now and then, we’ll get a few more data points that will sharpen expectations, including the ADP’s October Employment Report.
On the inflation front, the October Flash PMI data showed a “sharply reduced rate” for average prices, marking the lowest level since May 2020. Cooler data was notably called out for the service sector, which hit a four-and-a-half-year low. This is going to be very supportive for further progress on inflation, but we will want to see it matched by similar data in the October PMI reports from ISM.
Looking ahead, new orders for goods and services also rose at the sharpest rate in 17 months, reflecting higher sales and stronger demand. Again, very good for the economy and GDP prospects in November, but we’ll want to see the same with ISM’s data out next week and the week after.
All told, the Flash October PMI data from S&P Global is a very favorable report for the economy and inflation, and suggests a “Goldilocks” environment. It's not an environment the Fed needs to foster with immediate rate cuts, but one that can handle a more moderate pace of cuts quite easily. Of course, we will not hang our hat on any one set of numbers, which means remaining vigilant as final October data starts coming at us next week.
