U.S. Flash PMI Surveys Signal Weak Third Quarter Despite September Uplift

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US flash PMI surveys signal weak third quarter despite September uplift

The September Markit flash PMI surveys indicate that the US economy has struggled to gain growth momentum at the end of the third quarter. Although business activity grew at a slightly increased rate, the still-sluggish pace of expansion and worries about future order book growth prompted firms to ease back further on their staff hiring.

Inflationary pressures meanwhile fell as firms struggled to pass through price rises amid weak demand, and input cost inflation slowed.

Another weak quarter of growth

The seasonally adjusted Markit Flash Composite PMI Output Index, a weighted average based on both manufacturing and services PMI surveys, ticked up to 52.0 in September from 51.5 in August. This pointed to the largest monthly increase in output for five months, but the rate of growth remained relatively modest.

At 51.8, the average composite index reading for the third quarter is only slightly higher than the 51.5 average seen in both the first and second quarters of the year, and down sharply from the average of 55.8 seen in 2015.

Markit PMI vs. GDP*

* Circles highlight weak Q1 GDP anomalies

The PMI suggests that GDP growth has failed to accelerate from the 1.1% annualised pace seen in the second quarter. This poses downside risks to the current consensus, based to a large extent on 'nowcast' models, that the economy is expanding at a 2.5-3.0% pace. Historical comparisons of the PMI and GDP put third quarter GDP growth at 1.0%.

A similar situation was seen in the first two quarters of the year, when the PMI was considerably weaker than consensus but was subsequently shown to have accurately anticipated disappointingly modest GDP data.

Manufacturing output vs. services activity

Optimism near post-crisis low

A drop in optimism about the year ahead to a near post-crisis low meanwhile cast a shadow over the outlook. While only monitoring service sector confidence, the PMI's Business Expectations Index acts as a useful guide to business activity in the coming months.

With the Business Expectations Index dropping to the third-lowest level seen since the series began in 2009, the survey suggests the pace of economic growth will remain muted as we move into the fourth quarter.

Future optimism

Further weak future business activity growth was also signalled by the latest survey showing inflows of new business across the two sectors rising at the slowest rate since March.

Broad-based malaise

The September PMI numbers showed only modest growth in both manufacturing and services, pointing to ongoing broad-based malaise in the economy compared to last year. Although service sector business activity grew at the fastest rate for five months, the average growth in the third quarter was down slightly on that seen in the three months to June.

Manufacturing, in contrast, enjoyed its best quarter so far this year. However, with production growth losing steam somewhat in September, the overall expansion remained frustratingly subdued.

Jobs growth weakest since June 2012

With inflows of new business waning and worries about the outlook intensifying once again, companies continued to pull back on their hiring. Employment across both sectors rose at the slowest rate since June 2012, registering one of the smallest gains seen in the recovery from the global financial crisis over the past six years.

Employment growth in the vast service sector was the weakest for three and a half years. Factory headcounts rose at an increased rate, but the rate of job creation remained sluggish overall.

Markit PMI vs. non-farm payrolls

Sources: IHS Markit, Datastream.

Historical comparisons indicate that the survey results are consistent with a 120,000 rise in non-farm payrolls in September. While that's still a solid rate of expansion, it's a somewhat disappointing rate of hiring compared to the gains seen earlier in the year.

The slowdown in hiring is perhaps a natural symptom of the economy reaching full employment, but companies also reported a reduced appetite to hire and job losses due to weaker inflows of new business and worries about the outlook.

Inflationary pressures fall further

Inflationary pressures meanwhile cooled during the month. Input prices across the two sectors barely rose in September, registering the smallest monthly increase for just over one and a half years.

Average selling prices for goods and services also broadly stagnated, the marginal increase being the smallest rise recorded since April. A minor fall in average factory gate prices was accompanied by a slowing in service sector price inflation, highlighting the broad-based weakening of inflationary pressures.

PMI Prices Indices

Source: IHS Markit.