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  • Writer's pictureJonathan Wilmot

Turning UP

No recession in sight: as the inventory cycle matures and supply chain issues fade, optimism for future output is surging in manufacturing. In the service sector demand continues to recover back towards its pre-pandemic trend.

February flash PMIs showed improvement for both manufacturing and non-manufacturing. G4 services new orders PMI registered 51.6, up 2.7 points on the month and the first expansion since June last year. New orders troughed in August last year at 46.6. For once services are leading: manufacturing new orders now look to have troughed too, improving to 45.4 from 43.7 in January (Figure 1). More impressive still is the strong rebound in forward looking optimism (Figures 2 and 3).

Disinflation in progress: the news on inflation was positive too, but with a slight sting in the tail. For global goods prices normal service (deflation) has pretty much resumed but of course service sector inflation is much stickier. (Figures 5 and 6).

In year on year terms core service sector inflation has dipped only slightly, but momentum has come down considerably over the last few months. For the US in particular non-manufacturing PMI output prices have been pointing towards further progress ahead (Figure 7). Meanwhile, consumers have clearly been shifting towards cheaper goods/services/suppliers in response to the cost of living shock last year. That mindset will also make it harder for firms to pass on future costs increases.

The sting in the tail is that, as the service sector recovery continues labour demand in the hospitality and retail is recovering too. Indeed, in US non-manufacturing PMI employment rose at the fastest pace since last September. And perhaps ominously the output price index for non-manufacturing ticked up slightly on the month. Fuel for the more hawkish members of the FOMC.


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