The U.S. economy is declining at a pace not seen since the 2008–09 financial crisis, said Chris Williamson, chief business economist at S&P Global Market Intelligence, citing the latest round of Purchasing Managers' Index (PMI) readings.
The headline Flash U.S. PMI Composite Output Index fell into contraction territory at 47.5 in July, from 52.3 a month ago, indicating a significant decline in private sector output. The pace of decline was the fastest since the early phases of the COVID-19 pandemic in May 2020, as both manufacturers and service providers reported weak demand conditions.
The services PMI fell short of the market estimate, with a reading of 47, down from 52.7. That was the biggest decline since May 2020, driven by a decrease in new exports, a drop in job creation, a jump in prices, and business confidence being at its lowest level since September 2020.
The manufacturing PMI eased to a two-year low of 52.3 in July, from 52.7 in June—anything above 50 indicates expansion. The market had penciled in a reading of 52.
This month, production levels were flat, new orders fell, employment growth moderated, and business sentiment plummeted to its lowest level since October 2020. More firms noted that they plan to cut personnel and slash costs.
PMIs are crucial economic indicators since they can suggest a general direction of trends in the manufacturing and service sectors.
"The U.S. #economy is contracting at a rate not seen since the global financial crisis in 2009 (excluding the initial pandemic lockdown), as the flash #PMI covering output of manufacturing and services fell sharply in July," Williamson posted on Twitter.
Worse to Come?
Williamson noted that multiple forward-looking indicators, including the orders-inventory ratio signal, suggest that “worse is to come for U.S. manufacturing in August."
"This means the #FOMC is hiking interest rates at a time when the U.S. economy is already showing severe signs of stress & recession risks have risen,” he wrote.
This week, the Federal Open Market Committee (FOMC) will be holding its two-day July policy meeting. The market widely expects the Federal Reserve to raise interest rates by 75 basis points for the second consecutive month, although there's a 20 percent chance of a 100-basis-point increase amid skyrocketing inflation, according to the CME FedWatch Tool.
While some market analysts think that this will help trim headline inflation levels, they also fear that these efforts might facilitate a recession.
"As for next year, we strongly suspect rate cuts will be the key theme," ING economists wrote in a research note. "By delaying their response to high inflation and now having to move policy faster and deeper into restrictive territory, there is clearly the fear of a recession. At the same time, we think inflation could fall sharply from March next year onwards."
Speaking in an interview with CNBC, economist Mohamed El-Erian said inflation has likely peaked, but it might be at the expense of the economy.
"I think inflation has peaked in the U.S., at least for the next three to four months. We've got to see how sticky some elements are," he said on July 22. "But the problem is not that inflation is going to come down—that's a really good thing. The problem is that inflation is going to come down with growth probably going into a recession, and that's not good news."
Concerns over an economic downturn have dramatically increased over the past month.
In addition to a higher-than-expected 9.1 percent consumer price index (CPI) in June, a broad array of metrics released this month have indicated a slowing economy
Personal spending eased to a 0.2 percent increase month-over-month, while personal income was unchanged at a 0.5 percent increase. The Institute of Supply Management's (ISM) Manufacturing PMI fell to 53, construction spending tumbled by 0.1 percent, industrial production fell by 0.2 percent, and manufacturing output dropped by 0.5 percent.
Sentiments and expectations have also deteriorated among companies and consumers.
The National Federation of Independent Business (NFIB) Optimism Index slipped to 89.5 (100 was sentiment in 1986), the IBD/TIPP Economic Optimism Index in the United States remained at an 11-year low, and the Conference Board's Consumer Confidence Index tumbled to 98.7 (100 was sentiment in 1985).
Despite the strong June jobs report, there have been signs that the labor market could be growing sluggish.
The number of Americans filing new claims for jobless benefits rose to a nine-month high of 251,000 in the week ending on July 16, according to the Bureau of Labor Statistics (pdf). The four-week average, which removes week-to-week volatility, has steadily climbed every week since the beginning of April.
Job openings and quits took a breather in May, while job cuts swelled in June.
Is the US in Recession?
In the meantime, all eyes will be on the second-quarter gross domestic product (GDP) report to determine if the United States has slipped into a technical recession. The market consensus is a growth rate of 0.4 percent, while the Bloomberg GDP estimate range from 55 economists is between minus 0.6 percent and 1.2 percent. But the Atlanta Fed Bank's GDPNow model estimate shows minus 1.6 percent in the April-to-June period.
Many organizations have lowered their GDP forecasts for the next few years. S&P Global’s latest projections show zero percent in 2022, minus 0.4 percent in 2023, minus 0.2 percent in 2024, and minus 0.2 percent in 2025. The Conference Board downgraded its second-quarter expectation from 1.9 percent to 0.8 percent. For 2022, the Conference Board anticipates 1.7 percent expansion before slowing to 0.5 percent growth next year.
But until there's considerable weakness in the labor market, the Fed's tightening cycle will function on auto-pilot, according to Scott Anderson, chief economist at Bank of the West Economics.
"It feels a bit like one of those bad horror movies where the creepy music is already playing, but the character continues to walk into the seemingly abandoned house," Anderson wrote in a note. "You know this isn’t going to end well though you’re not yet sure what is about to happen."
According to the Fed's Summary of Economic Projections that was updated from March, the median unemployment rate forecasts were raised to 3.7 percent in 2022, 3.9 percent in 2023, and 4.1 percent in 2024 (pdf).