FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 9, 2022

IN THIS ISSUE:

1. Overview – US Business Activity Fell Sharply In July

2. Economy Adds 528,000 Jobs In July, Double Expectations

3. Biden’s “Inflation Reduction Act” Unpopular With Voters

Overview – US Business Activity Fell Sharply In July

Business activity contracted for the first time in nearly two years in July as a sharp slowdown in the service sector outweighed continued modest growth in manufacturing, thus painting a grim picture for an economy stunted by high inflation, rising interest rates and deteriorating consumer confidence.

S&P Global on Friday said its preliminary – or "flash" – US Composite PMI Output Index had tumbled far more than expected to 47.5 in July from a final reading of 52.3 in June. With a reading below 50 indicating business activity had contracted, it is a development likely to feed into the growing debate over whether the US economy is back in a recession after rebounding sharply from the downturn in early 2020 at the start of the COVID-19 pandemic.

July's fall marked the fourth monthly drop but was the first to decline below 50. As noted above, the drop was largely driven by pronounced weakness in the services sector index, which fell to the lowest point since May 2020 at 47.0 from 52.7 a month earlier. That was enough to offset relative steadiness in manufacturing, with the group's factory activity index edging down to 52.3 from 52.7, indicating the sector was still growing but now at its weakest pace since July 2020.

Economists polled by Reuters had a median estimate for the services sector index at 52.6, while the manufacturing index was seen coming in at 52.0.

"The preliminary PMI data for July point to a worrying deterioration in the economy," S&P Global Chief Business Economist Chris Williamson said in a statement. "Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis."

S&P Global's measures of new orders in the manufacturing sector, outstanding business in the services sector and future expectations in both fell to levels not seen since the first year of the pandemic.

The report was the latest in a spate of economic indicators that have "surprised" to the downside relative to economists' expectations and have fueled anxiety from Wall Street to Main Street over whether the economy is stalling out. Citigroup's US Economic Surprise Index last month registered its lowest reading since May 2020 and is believed to have remained negative in July.

The S&P Global data point to US Gross Domestic Product falling at roughly a 1% annualized rate, Williamson said. The economy contracted at a 1.6% rate in the first quarter, largely because of business inventory management issues, and near the end of July we got the government’s advance estimate of 2Q GDP which came in at -0.9% (annual rate). This marked the second consecutive quarter of negative GDP growth, which many believe constitutes a recession.

The report also painted a picture of a softening employment scene, which so far has defied expectations for a notable slowdown, with unemployment still near a half-century low. S&P Global said its manufacturing employment index dropped to the lowest point since July 2020 while services employment registered its weakest growth since February.

By comparison, the widely followed ISM Manufacturing Index remained above 50 in July, although it did fall slightly from 53.0 to 52.8 last month. Here too, a reading above 50 indicates the economy is expanding, whereas a reading below 50 indicates contraction. The ISM Services Index actually expanded from 55.3 in June to 56.7 in July.

So, by these two measures, the economy does not appear to be in a recession, despite back-to-back negative quarters of economic growth in the first half of the year.

Meanwhile, some inflation metrics softened somewhat last month, though they remained extremely elevated. S&P Global’s composite gauge of input prices eased to a six-month low and the output prices measure dropped to the lowest since March 2021.

The Consumer Price Index soared to an annual rate of 9.1% in June (latest data available), the highest level in over 40 years. We get the next CPI report for July tomorrow and the pre-report consensus is for it to ease to an annual rate of only 1.3% for the past 12 months. That would be a huge drop in one month, so it will not surprise me if it comes in higher than 1.3%. We’ll see.

Elsewhere, firms’ expectations for the future deteriorated, falling to the lowest since 2020, as weaker demand and soaring inflation weighed on sentiment. While the employment gauges signaled continued growth in July, the report said more firms indicated plans to cut costs and reduce staffing numbers.

The bottom line is, another key economic indicator, business activity, has fallen below 50, signaling contraction instead of expansion. Thus, it will not surprise me if the National Bureau of Economic Research declares we are officially in a recession soon.

Economy Adds 528,000 Jobs In July, Double Expectations

The US economy has finally regained all the jobs lost during the pandemic, after a blowout July jobs report showed a gain of 528,000 jobs, according to data released Friday by the Bureau of Labor Statistics. The huge monthly gain was more than double the 250,000 that economists were expecting.

The headline unemployment rate ticked down to 3.5% after holding at 3.6% for the past four months. The July jobless rate matched the half-century low last seen in February 2020.

Friday's employment snapshot marks the 19th consecutive month of job growth and is the highest monthly gain since the economy added 714,000 jobs in February. July's job totals outpaced the average monthly gain of 388,000 jobs of the past four months, BLS data shows.

Job growth was especially strong last month in the health care industry and at hotels and restaurants.

The Labor Department also reported that hourly earnings posted a healthy 0.5% gain last month and are up 5.2% over the past year. But that is not enough to keep up with inflation, and many Americans are having to scrimp to pay for groceries, gasoline, even school supplies.

At the White House, Biden credited the strong job growth to his policies, even as he acknowledged the pain being inflicted by inflation. He emphasized the addition of 642,000 manufacturing jobs on his watch. “Instead of workers begging employers for work, we’re seeing employers have to compete for American workers,” the president said.

The truth is, the president can take credit for the strong jobs report all he wants, but it is not the result of his economic policies. The labor market is still recovering from the ill-conceived economic lockdowns in 2020 and 2021 due to the Covid scare. Most economists now agree the lockdowns were unnecessary and didn’t work.

Biden’s “Inflation Reduction Act” Unpopular With Voters

Given the state of the economy, gas prices, baby formula shortages, inflation across the board and a disruptive two-year pandemic, favorability towards Washington leaders is unsurprisingly low. President Biden and the Democrats’ approval ratings are the lowest for any president in history at just 38%, according to the latest Gallup Poll. This is why, understandably, elected officials want to return home before the midterm elections with some good news to curry favor with their constituents.

The Inflation Reduction Act was so named for this very reason. It includes new spending to extend Affordable Care Act subsidies, which are otherwise set to expire in October just before a large block of voters head to the polls. To help pay for these subsidies, the bill includes new taxes and Medicare prescription drug reform which lawmakers characterize as "savings" for seniors.

The problem is, it is hugely unpopular to rob Peter to pay Paul, heralding savings for Medicare on one hand, while neglecting the impact of reduced innovation and development for medications on the other.

Moreover, it is unfavorable to reallocate Medicare savings to pay for new spending such as the Affordable Care Act subsidies and green energy policies. Regardless of where lawmakers fall on this approach, a majority of voters oppose this spending plan.

While drug reform on its own polls favorably when presented as a potential savings for seniors, these numbers swing considerably when tied to legislation that includes more government spending, and specifically to pay for the extension of Affordable Care Act subsidies. This is why these purported Medicare savings in the long run will actually become cuts to the program.

Some argue this is not really cutting Medicare, but the numbers are revealing. Just last week, Senate Democrats released a fact sheet which outlines where the revenue comes from to finance the new spending. And the “cuts” are not sitting well with voters. 

A survey for the American Prosperity Alliance, conducted by OnMessage, Inc., found that constituents across four key states – Georgia, Nevada, New Hampshire and West Virginia – are expressing their frustration with the current leadership in Washington. 

The poll also found that 69% in Georgia, 54% in Nevada, 71% in New Hampshire and a staggering 80% in West Virginia are less likely to support the Inflation Reduction Act after learning it cuts $300 billion from Medicare.

It is no surprise that 70% – 80% of those surveyed feel the nation is on the wrong track, and 53% - 67% are staunchly opposed to raising taxes to fund more government spending in the midst of a recession.

The question is, why don’t the politicians ever learn? All they want to do is spend more and more, despite what the voters think.

I’ll leave it there for today.

Best personal regards, 

Gary D. Halbert

SPECIAL ARTICLES

U.S. Business Contracts For First Time In Two Years

528,000 New Jobs In July, Double Expectations

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