US Business Activity Slumps But Prices Ease

U.S. business activity contracted further in December as new orders slumped to the lowest level in just over 2-1/2 years, but softening demand helped to significantly cool inflation.

S&P Global said on Friday its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 44.6 this month from a final reading of 46.4 in November. It was the sixth straight month that the index remained below the 50 mark, which indicates contraction in the private sector.

Economists polled by Reuters had forecast the index at 47.

The Federal Reserve’s aggressive interest rate increases to tame inflation are weighing on the economy, though the labor market remains strong as businesses are not keen to lay off workers following difficulties finding labor during the COVID-19 pandemic years.

The U.S. central bank on Wednesday raised its policy rate by half a percentage point and projected an additional 75 basis points of increases in borrowing costs by the end of 2023. This rate has been hiked by 425 basis points this year from near zero to a 4.25%-4.50% range, the highest since late 2007.

The flash composite new orders index dropped to 45.8, the lowest level since May 2020, when the nation was slammed by the first wave of the pandemic. It was down from a final reading of 46.2 in November.

With demand faltering, supplier deliveries improved while prices for inputs increased at a slower rate.

According to S&P Global, “cost burdens rose at the slowest pace since October 2020,” and “private sector firms recorded a softer uptick in output charges.”

That suggests the recent moderation in consumer and producer prices could extend into next year, offering relief to consumers who have been squeezed by high inflation. Consumer prices increased less than expected for a second straight month in November, government data showed this week.

“December saw a second successive month of faster supplier delivery times, a phenomenon which not only signals improving supply conditions but also tends to herald the shifting of pricing power away from the seller towards the buyer,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Private sector employment continued to grow this month, though the pace has moderated from early in the year.

The survey’s flash manufacturing PMI dropped to a 31-month low of 46.2 in December from 47.7 in November. Economists had forecast the index holding steady at 47.7. New orders remained subdued, with manufacturers reporting one of the sharpest declines since the 2008-9 financial crisis.

The survey’s flash services sector PMI declined to 44.4 from 46.2 in November. Services businesses also reported weak demand and a moderation in input prices.