The U.S. economy right now is all about one word: “But.”
In the Institute for Supply Management’s latest services sector report released Monday, one business leader told the organization that “Some uncertainty hinges on tariffs. But there have been no changes in market conditions.” (Emphasis added.)
On Monday, ISM and IHS Markit both released readings on the services sector — which accounts for about 85% of GDP growth — that showed the economy expanding, albeit at a slower pace. ISM’s services index came in at 53.7 against estimates for 55.5, while IHS Markit’s index hit 53.0, against estimates for 52.2.
Monday’s reports both served as signs of an economy full of market participants and business leaders concerned about the specter of tariffs causing a recession. Still, the economy is expanding nonetheless.
“An improvement in the overall rate of business growth signaled by the services PMI for July is welcome news,” said Chris Williamson, chief business economist at IHS Markit.
“But the overall weak pace of expansion remains a concern.”
There’s that word again.
A trader works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., August 5, 2019. REUTERS/Brendan McDermid TPX IMAGES OF THE DAY
“The PMIs for manufacturing and services collectively point to [US] GDP expanding at an annualized rate of under 2% in July, below that seen in the second quarter and among the weakest seen over the past three years,” Williamson added.
In the ISM report, one executive from the corporate support services industry said July was “looking to be a record-setting month for sales.”
The person added that, “customers have been converting quotes to sales quicker than in past months. The tariffs have increased prices for our industry, but our clients are not balking at the slight price increases that have been passed along.”
On Monday, markets were selling off sharply following the Chinese yuan’s drop below 7 yuan per dollar, and reports that Beijing had asked state-owned firms to stop purchases of U.S. agricultural products. Those moves were signs of escalation in the U.S.-China trade war.
The slower pace of growth signaled by Monday’s data also isn’t likely to improve investor sentiment. After all, stock prices are not estimating the present value of companies, but their future value. And all else equal, slower economic growth means slower profit growth for businesses.
Slower growth, however, does not imply a recession.
Andrew Hunter, senior US economist at Capital Economics, said Monday that ISM’s data paints a more bearish picture of the economy than that offered by Williamson. A recession, however, remains unlikely given the data.
“A weighted average of the ISM indices is consistent with zero economic growth at the start of the third quarter,” Hunter said.
“We don’t think the economy is about to plunge into recession — after all, payroll employment growth is still solid and other leading indicators, including initial jobless claims, show few signs of deterioration.
“But the ISM survey clearly supports our view that economic growth will slow sharply in the second half of this year.”
And in this economy, there’s always a but.
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Myles Udland is a reporter and anchor at Yahoo Finance. Follow him on Twitter @MylesUdland
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