New US recession warning: PMIs fall to May 2020 levels and services sector slumps

And the July Flash PMIs in the euro zone This Friday they suffered a hard blow of reality, those of the USA redoubled their impact. The Purchasing Managers’ Indices (PMI), one of the thermometers of the economic situation, paint a more than gloomy picture of the world’s leading economic power.

Composite PMI glow July falls to 47.5 from 52.3 in June, hitting 26-month lows. The the service sector is the most affected in this reading, lowering of the index from 52.7 to 47, also hitting 26-month lows. It should be remembered that, in these indices, less than 50 implies a contraction. Less painful was the drop in the manufacturing PMI, remaining at 52.3 versus 52.7 previously and 52 expected by analysts. Even so, that marks a minimum of 24 months.

The catastrophic reading, particularly damaging in the services sector, was quick to make itself felt in the markets. The dollar started to retreat with force. The Dollar Index (DXY), a comparison of the US currency with a basket of global currencies, fell a remarkable 0.7%. The US 10-year bond momentarily fell from 2.8% to 2.74%.

“Preliminary PMI data for July points to a worrying deterioration of the economy. Excluding the month of confinement due to the pandemic, production fell to a rhythm not seen since 2009 in the midst of the global financial crisis, and survey data indicates that GDP is falling at an annualized rate of around 1%,” said Chris Williamson, chief economist at S&P Global Market Intelligence.

“The manufacturing sector has stagnated and the recovery of the service sector after the reversal of the pandemicas the tailwind of pent-up demand has been offset by rising costs of living, rising interest rates and growing pessimism about the economic outlook,” adds Williamson.

“The accelerating pace of deterioration in the order backlog, with a sharp decline in the order backlog in July, reflects excess operating capacity relative to demand growth and points to production, both in the sector manufacturing than in the service sector, it will be further reduced in the coming months,” adds the expert, noting what lies ahead.

This devastating PMI report comes the week before two key events in the United States: the July 27 Fed meeting and the publication of the first official GDP data for the second quarter. In the first case, the Fed seems determined to raise its rates again by 75 basis points, as in June, after excluding a 100-point rise that housing data dimmed and that these PMIs are now almost completely erased.

At the second milestone, a new negative GDP after the first trimester it would show two consecutive periods of contraction, which is generally considered a technical recession. Although the conditions set by the NBER for talking about a recession are not met, negative headlines would be guaranteed and confidence would be further shaken.

Looking for a silver lining in today’s data, Williamson turns to inflation: “The weakening demand environment has contributed to mitigate inflationary pressures. As a result, average prices for goods and services rose at a very slow pace in July, and the inflation rate remains elevated by historical levels, but has now fallen to its lowest level in 16 months, bringing much needed good news. in the midst of the current cost of living crisis.”


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