Summary

 

A slowing services sector presents headwinds for the US economy.

In our 4Q Quarterly Outlook , we wrote “The Fed’s hawkish stance will impact growth negatively, which will likely be reflected in upcoming macroeconomic data releases”. This is turning out to be true.

The US services sector appears to be losing momentum. This will present headwinds for the US economy since the sector had supported the economy while high costs and weak global demand had weighed on manufacturers. US consumption had benefited from pent up demand and consumption rotation following the end of COVID-related restrictions. On the other hand, the US ISM Manufacturing PMI had been below 50 for 12 consecutive months.

In the latest reading for October, the ISM services index fell from 53.6 to 51.8, below expectations and is the lowest since May 2023. New orders rose, but export orders fell into contractionary territory (48.8), reflecting global weakness. Notably, firms reduced inventories instead of increasing production. While still-expanding US services activity and rising new orders are positives for the economy, the drop in the headline figure and drawdown in inventories suggest that the US economy may be losing steam.

October’s weaker than expected employment report corroborates with this view. Payrolls increased by 150k in October, below expectations of 180k and marks a slowdown from the 297k increase in September. The cumulative increase in the prior two months was also revised down by 101k while the unemployment rate unexpectedly rose from 3.8% to 3.9%. US inflation also fell to 3.2% in October, the first decline in four months.

Eastspring’s Multi Asset Portfolio Solutions (MAPS) team believes that the cumulative effect of rate hikes will eventually chip away at the US economy’s resilience. In their view, a US recession is likely from mid-2024 although the slowdown would probably be shallow as US corporate and household balance sheets remain relatively healthy. Hence, the team is opportunistically positive on US equities in the near term but are positive on Asia ex Japan equities over the medium term given the region’s better economic fundamentals and cheaper valuations.

As the US economy loses momentum, US yields should price downwards over the medium term, reflecting the higher probability of rate cuts. This would be positive for US Treasuries and quality bonds.

US ISM Services PMI

US ISM Services PMI

Source: Bloomberg. November 2023.

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