(Editor's Note: Welcome to our weekly summer series discussing mixed signals from U.S. economic data. This series will run from July-August 2024.)
Key Takeaways
- S&P Global Ratings economists expect slight manufacturing growth and cooling services growth, but diverging business sentiment data is giving conflicting signals about overall U.S. growth momentum heading into the second half of the year.
- The S&P Global Market Intelligence Purchasing Managers' Indices (PMIs) suggest manufacturing may have turned a corner after several quarters of shrinking, while services are expanding steadily.
- On the other hand, The Institute of Supply Management's PMIs indicate manufacturing and services growth could be slowing.
Data-related uncertainty has risen since the height of the pandemic, and past empirical relationships have been less reliable for forecasting. Survey data from the Purchasing Managers' Indices (PMIs) are adding to that uncertainty, sending mixed signals about growth headed into the second half of the year. Taking into consideration the differences in sampling and how the PMIs have tracked hard data, we lean toward the more positive growth signal provided by the S&P Global Market Intelligence PMIs.
While the S&P Global Market Intelligence PMIs for both manufacturing and nonmanufacturing show the sectors are expanding, the PMIs by the Institute of Supply Management (ISM) show manufacturing has been in contraction year to date and services slowed in June (see charts 1 and 2). (S&P Global Market Intelligence is a division of S&P Global, as is S&P Global Ratings.)
Chart 1
Chart 2
Spotlight On The Purchasing Managers' Index (PMI)
The PMI is essentially a diffusion index, which can help in assessing the prevailing direction of demand. A value above 50 indicates expansion and anything below indicates contraction. By surveying purchasing managers in largely the private sector (manufacturing and services), the PMIs estimate whether demand is improving, deteriorating, or unchanged. Both ISM and S&P Global Market Intelligence publish separate composite indices for the manufacturing and services sectors, aggregating various sector-specific components such as new orders, production, prices, employment, etc.
PMIs influence financial markets for two main reasons. First, they are the first piece of economic news out each month. Second, even though manufacturing has become an increasingly smaller portion of the economy over the years (nearly 11% of nominal GDP today, compared with 28% in 1953), the overall manufacturing PMI has been effective in the past at signaling turning points in the business cycle and is thus also linked with GDP growth.
We Expect A Modest Pick-up In Manufacturing
S&P Global Ratings economists believe the manufacturing sector has largely overcome supply chain issues but has failed to make meaningful progress beyond that. Industrial production and manufacturers' new orders appear to have been on a sideways trend since late 2022, with a hint of modest firming in the last five months, notwithstanding monthly volatility in September-January (see charts 3 and 4). We don't expect major improvements in manufacturing until the cost of financing eases.
Chart 3
Chart 4
Market Intelligence's manufacturing PMI shows the sector started expanding earlier in the year, while the ISM shows a continued contraction. The recent three-month average PMI for Market Intelligence is 50.9, compared with 48.8 for the ISM. The Market Intelligence manufacturing output subindex has been expanding since February, whereas the ISM equivalent fell unexpectedly in June after starting to pick up in March. The new orders subindex for manufacturing also contracted for ISM but expanded for Market Intelligence.
Much of the discrepancy can be attributed to different sample sizes. The S&P Global Market Intelligence PMI surveys around 800 manufacturers of varying sizes, aiming to better grasp trends in small and medium industries. The ISM, on the other hand, surveys fewer but larger companies--nearly 400 across 20 industries--which can be limited in explaining larger trends in manufacturing (for an in-depth comparison, see "S&P Global PMI® and ISM survey comparisons").
We Look For Moderation In Services Growth
PMIs reveal a conflicting picture of growth momentum in the services sector as well. Hard data also reveals some cooling--with quarterly growth edging down since the third quarter of last year (see chart 5)--and we expect further moderation amid consumer cost fatigue.
The sector has largely returned to pre-pandemic trend, which suggests that the growth impulse from catching up to that trend is now behind us. For the Federal Reserve, this is a signal that monetary policy is cooling consumer demand beyond the interest-rate-sensitive goods sector.
Chart 5
The ISM services business activity (BA) index has been quite volatile this year, making it difficult to predict how the services industry will fare. Market Intelligence's Services BA index, meanwhile, picked up in June to its best reading since last summer. The Market Intelligence index is also less volatile, although the ISM index remains significantly above it, apart from an unexpected contraction in June (to 49.6 from 61.4 in May).
This discrepancy also owes to differences in sample sizes used by ISM and Market Intelligence. The smaller sample size used in the ISM survey explains the relative stability of the Market Intelligence services BA index. That said, because the ISM services index includes large industries and government services, we would have expected it to be more resilient to market volatility than the sharp changes so far in 2024 indicate.
Furthermore, the ISM sample might give a narrower snapshot of demand, because it includes larger firms that are represented by official purchasing executives. The Market Intelligence index includes more medium and small companies and surveys more than just official purchasing executives, potentially capturing some nuances for smaller firms that the ISM misses.
New orders fell into contraction in the ISM services PMI in June 2024 for the first time since December 2022, leaving the three-month average now barely expansionary (see chart 6). For the Market Intelligence survey, trends in new orders for services have been volatile but picked up slightly over the last two months (see chart 7).
Chart 6
Chart 7
In the ISM index, employment in services has largely contracted since December 2023, while the Market Intelligence index does not show any strong trends in employment between 2023-2024 (see chart 8). Weakening employment in services in the ISM survey is at odds with private services payroll employment gains, which have continued at a steady clip. Hours worked have edged down but remain normal while the percent of private sector industries with increasing employment is higher than that with decreasing employment (see chart 9).
Chart 8
Chart 9
Different Underlying Data Gives Us Pause About Near-Term Growth Momentum
The different underlying data in the Market Intelligence PMI and the ISM PMI indicates small and medium businesses may be faring better than the ISM is suggesting. Nevertheless, the diverging soft data gives us reason to pause before making any bold claims about the trajectory of the U.S. economy.
The views expressed here are the independent opinions of S&P Global Ratings' economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
This report does not constitute a rating action.
| Primary Analysts: | Satyam Panday, San Francisco + 1 (212) 438 6009; satyam.panday@spglobal.com |
| Aliyah Sahqani |
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