Today’s PMI report shows economic conditions slowing more than expected in the US in the middle of the third quarter, but not enough to entirely kill off the narrative of US exceptionalism.
In fact, and whisper it quietly, this report reads a lot like the next leg in an American soft landing. The composite measure slowed to 50.4, undershooting an anticipated print of 51.5, driven largely by a 2 point drop in the manufacturing index to 47.0. In comparison, the services index fell only 1.3 points to 51.0.
- Composite: 50.4 vs 51.5 expected
- Manufacturing: 47.0 vs 49.0 expected
- Services: 51.0 vs 52.2 expected
Today’s PMI reports once again confirmed the US exceptionalism narrative, even though the readings missed expectations
Although the weaker readings were definitely seen as a disappointment by markets, which have recently toyed with the idea of a much higher neutral rate of interest in the US, the data did little to significantly dent the US exceptionalism narrative as the report proved much more constructive than those from European counterparts.
Following today’s release, we expect that the Atlanta Fed’s GDP nowcast could be trimmed back from 5.8% growth in Q3, but to a growth rate that remains some distance away from an imminent recession like in Europe. For the Fed, the continuation in the gradual slowdown of the economy as opposed to signs that a harder landing is back on the table will be a welcome development, but it is the details of the report that will put a bigger smile on policymakers’ faces. The recent slowdown in hiring was seen persisting in August, while lagging wage increases are no longer being passed onto consumers in their entirety as firms seek to remain competitive.
Granted, there remains a litany of data to be released ahead of the Fed’s September 20th decision, but most signs for the US economy are currently positive and if sustained should see the Fed continue to take a pew on the sidelines.
Confounding the readthrough from the employment sub-index was the release shortly after of revisions to the establishment survey data. This suggested that US payrolls were likely 300k less than previously estimated in FY22. Whilst this implies that initial estimates were overstated, the revisions were smaller than some economists expected too, and ultimately does not alter the picture of a robust labour market.
Whilst the broad dollar sold-off on the news that the US economy was tracking a lower growth rate than analysts had initially expected, with the sell-off extended by news of the payrolls revisions, we believe this move is overdone.
True, the US economy is now seen as less resilient to the higher rate environment than fixed income traders have suggested in the past week, but in comparison to Europe and China, the economic fundamentals underpinning the dollar are far more stable. Unless the upcoming round of inflation and labour market data shows renewed economic strain, we think it remains difficult to look past the dollar in the near-term on a broad basis.
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst