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Tuesday, December 6, 2022
Investors rely on a host of different readings to determine where the economy is headed.
So: what happens when two surveys that purport to measure the same thing show diverging results?
Economists try to find a middle ground.
Two different organizations released reports Monday on the services sector of the U.S. economy.
And looked at individually, these reports appear to be capturing two different U.S. economies.
S&P Global's service sector PMI said activity in the sector contracted in November, with its index falling to 46.2, the second-sharpest drop since May 2020. Just minutes later, the Institute for Supply Management came out with its own Services Purchasing Managers' Index, which showed services activity rose in November, to a reading of 56.5 from 54.4.
For both indexes, 50 is the dividing line between expansion and contraction.
Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, also suggested there is one important point of agreement between the two surveys: "Let’s not miss the forest for the trees. The important thing is to recognize that both are in clear downtrends, consistent with a cyclical downturn in overall growth."
Indeed, even the rosier ISM survey has declined seven out of 11 months this year, and at 56.5, is far below the high of 68.4 it reached in November 2021.
"Buoyant ISM readings are in line with a string of recent data releases — the November jobs report the latest among them — that the economy is not in a recession yet," wrote Oren Klachkin, Lead US Economist at Oxford Economics, in a note to clients on Monday.
"However, we maintain our conviction that an economic slump will arrive next year."
And though these headline readings are in seeming conflict, many economists try to synthesize both into their models.
"We suspect the truth will lie somewhere in between the two surveys, with growth dipping slightly below zero over the first half of next year — as recent temporary factors supporting consumption fade, and the lagged impact of higher interest rates feeds through," wrote Andrew Hunter, senior U.S. economist at Capital Economics, in a note to clients on Monday.
Additionally, both reports highlight how the Federal Reserve’s interest rate increases are starting to have the desired effect: chipping away at inflation.
S&P’s report found that input prices rose by the smallest amount in two years. The ISM's measure fell 0.7 percentage points, though to a still-hot reading of 70.
"A striking development is the extent to which companies are increasingly reporting a shift towards discounting in order to help stimulate sales, which augurs well for inflation to continue to retrench in the coming months, potentially quite significantly,” wrote Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, in a note accompanying the report.
And while the headline reading was relatively strong, according to the ISM survey new orders fell for the third straight month to the lowest level since July. S&P Global's survey also showed the sharpest downturn in foreign client demand in two-and-a-half years.
What to Watch Today
8:30 a.m. ET: Trade Balance, October (-$77.0 billion, $73.3 billion expected)
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