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US Sector PMI data showed that more sectors clocked growth in
November compared to the prior month, although goods-producing
industries appear to remain shackled by supply issues. As a result,
price pressures persisted, carrying implications for monetary
policy while the US economy grapple with the COVID-19 Omicron
variant uncertainties.
Six of seven sectors tracked registered output
growth
The latest IHS Markit US Sector PMI™ revealed that six of the
seven broad sectors tracked by the surveys reported higher output
in November, up from five in October, with the Technology sector
having returned to growth. Healthcare continued to lead the
sectors, which perhaps comes as no surprise amid the slight pick-up
in COVID-19 cases across the US.
Consumer Goods, on the other hand, persisted as the worst
performer and remained in contraction. Worryingly however, rather
than being demand led, the lowered output had been a reflection of
the lingering supply chain crisis.
Goods-producing sectors reflect severe demand-supply
gap
Studying the US Sector PMI sub-indices performance, one would
find that output had indeed been lagging demand primarily across
goods-producing sectors including most notably Consumer Goods but
also Technology and Basic Materials. This is an important issue as
highlighted in our
IHS Markit US Manufacturing PMI report. Despite some of these
supply chain problems having eased in November, the extent to which
production growth had been constrained is consistent with
manufacturing acting as a drag on the economy during the fourth
quarter. Similarly for US sectors, this will be something to
continue scrutinising given the potential drag this could pose to
output and thereby corporate earnings going into 2022.
As it is, our
IHS Markit Investment Manager Index had demonstrated in early
November that while risk sentiment improved towards consumer
discretionary, industrial and basic materials sectors, supply line
worries continued to limit the enthusiasm towards these to some
extent.
US sectors output minus new orders indices
More severe price pressures seen for goods-producing
sectors
Of no surprise here, the demand-supply imbalance had thereby
proven it is a sellers' market as input prices surged across all
seven sectors. This was most notable amongst the goods-producing
sectors, led by the Consumer Goods sector in November.
Meanwhile, consistent with the global trend, service sectors had
similarly experienced higher costs, driven by higher material
prices, energy prices and staff costs. This is also observed
through the wider US manufacturing and services PMI price
indices.
Although IHS Markit continue to view the issue of soaring
inflation rates, particularly in the West, as a bigger problem in
the short-term with headline inflation rates set to moderate from
2022 as supply bottlenecks clear and pent-up demand dissipates, the
potential "second round" effects - whereby current elevated
inflation rates could feed through to higher wages - should not be
ignored. The potential for this to become a bigger problem will
continue to be watched through the mix of US sector performance
going forward.
US sectors input price indices
US manufacturing and services price indices
US Sector PMI data implications
Amid the onslaught of supply chain woes, prices have been shown
to remain elevated and the recent US central bank rhetoric also
adopted a hawkish-tilt. Fed chair Jerome Powell in his end-November
speech noted that the Fed will look to drop the "transitory" view
towards inflation while highlighting that tapering of asset
purchases may be accelerated, inviting questions on interest rate
hikes that are expected to follow.
While recent price performances perhaps draw added attention
with regards to the risk of rising interest rates, the slowdown in
output growth warrants caution with any lift-off plans. Fed chair
Jerome Powell's comments also took the market by surprise at a time
when the COVID-19 Omicron variant was reported to be spreading,
with the latest news pointing to more US states reporting the
presence of the variant.
Even if the assumption of the vaccines holding their efficacy
rates against the new Omicron variant is proven to be true,
manpower disruptions with this potentially more virulent variant
remains a lingering concern particularly for the US which is
already facing a tight labour market. Not to forget that the
demand-supply imbalance may also further worsen if the market deems
there to be risks with the current shortages issues.
US PMI vs. FOMC policy decisions
All said, the US Sector PMI data will need to continue to be
watched closely going forward for the differentials in sector
performance to provide a more detailed picture of US economic
performance. The
relevance to equity investments had been displayed using a
sub-set with the national sector data, but the logic similarly
applies with watching relative momentum to derive better signals
for one's investment strategies.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
