Services Economy Rebounds But Stagflation Looms As Inventories Spike

Following the shizophrenic picture of Manufacturing in 'Murica that we got earlier in the week, this morning's Services surveys show a modest and consistent rise for Markit's PMI (strongest since January with input prices soaring at the fastest pace in 2 years, and new orders at 5-month highs), and ISM's (employment down as new orders rise).


A reminder of the divergence between ISM and Markit's view of Manufacturing...


But both Markit and ISM saw modest gains in the Services sector...


ISM Breakdown shows weakness in employment as new orders rise

  • Business activity rose to 60.8 vs 60.7 prior month
  • New orders rose to 60.5 vs 57.7
  • Employment fell to 55.8 vs 57.8
  • Supplier deliveries rose to 52.5 vs 51.5
  • Inventory change rose to 57.5 vs 54.0
  • Prices paid rose to 52.1 vs 49.2
  • Backlog of orders fell to 52.5 vs 57
  • New export orders rose to 55.0 vs 54.5
  • Imports rose to 51.0 vs 48.5
  • Inventory sentiment fell to 62.0 vs 63.0

Notably, while New Orders rose, we see that only 33% of respondents said new orders had improved (the lowest since January)...

Perhaps most critical is the surge in Inventories - expanding at the fastest pace since June 2010. If we build it this time, will they come again?

ISM Respondents seem positive overall but raise Obamacare as a worry:

"Labor continues to be constrained in the construction industry, driving cost increases. Regional unemployment rate of 2.7 percent is making hiring difficult on all phases of the construction supply chain." (Construction)


"Off to a very strong start — 2017 YTD results above 2016 actual and 2017 target. Expect trend to continue. Very positive outlook for our business." (Finance & Insurance)


"We continue to struggle with the unknowns surrounding Obamacare, whether it will be repealed, or replaced, and if replaced what does it mean for our health services business, as well as our health plans business." (Health Care & Social Assistance)


"Activity level continues to climb in the oil and gas sector with supply in certain spend categories continuing to tighten." (Mining)


"June has been quite a busy month in terms of internal food activity. Seasonal increases in beef and poultry overall. Produce has remained steady with some early summer items coming down in price as product moves from Mexico to California growing regions. Dairy slightly up due to summer season cream production increase." (Accommodation & Food Services)


"General overall optimism in economy. Still job growth issues with mismatch in available labor pool and jobs available." (Professional, Scientific & Technical Services)

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“The final PMI numbers came in higher than the initial flash reading and provide news of a welcome uptick in the pace of growth in the vast services economy at the end of the second quarter.


“The services data follow news from the sister manufacturing survey showing steady but unspectacular growth in US factories.


“Looking at the combined performance of manufacturing and services, output, order books and employment all gained momentum in June, and average prices charged for goods and services rose at the fastest rate for nearly three years.

Markit's data suggests a modest pick up in GDP...

“However, the average all-sector PMI reading for the second quarter is down slightly on the first quarter, suggesting that the underlying pace of economic growth remains somewhat subdued though still robust.


The surveys are historically consistent with annualised GDP growth of just over 2%. Actual GDP data are expected to show a stronger rebound, though largely reflecting volatile quarterly seasonal variations in the official data.”