The United States has observed an improvement in the business climate in August, which should postpone the risk of recession for a few more months. The ISM Manufacturing rose by 1.2 pp and reached 47.6. However, the index has been well in contraction territory since November 2022, the longest period since the GFC. The renewed decline in the “New Orders” sub-component (46.8) and the fact that no sub-component stands above the 50 threshold hint that the progress remains weak and insufficient to impulse a swift and sustainable return into the expansion zone. The ISM Non-Manufacturing climbed to 54.5 (+1.8 pp), an improvement broad-based across all of the main sub-components, with a notable jump in ‘Employment’ (54.7, +4.0 pp).
The Conference Board index of household sentiment went the other way and dipped to 106.7 (-7.9 pts). This fall is driven by the deterioration in the consumers’ assessment of current conditions (144.8, -8.2 pts) and their expectations for the coming six months (-7.8 pts, to 80.2). The strong divergence between these two assessments is considered as a recessionary signal.
The labour market continued to show signs of softness. In August, non-farm job creations amounted to 187k, which was admittedly an improvement from June (+105k) and July (+157k), but also a sharp slowdown comparing with the average of the three prior months (+241k between February and May 2023, +150k between June and August). The unemployment rate edged up to 3.8% (+0.3 pp) amid a rebound in the participation rate (62.8%, the highest level since February 2020), thus strengthening the idea that a rebalancing of the labour market was in progress, enabled by higher supply.
Inflation was rather disappointing in August, up 0.4 pp to +3.7% y/y, due to a surge in gasoline prices (+10.6% m/m). The Core CPI (on a seasonally adjusted basis) has kept falling however, by 0.4 pp to +4.3%. The Fed decided to keep unchanged its policy rates as the outcome of the September meeting and reached the terminal rate according to our baseline scenario, but risks are tilted to the upside and the median Committee member sees another +25 bps before the end of 2023. The US 10-Year yield rose to a 16-year record high (around 4.40%).
The Atlanta Fed’s nowcast estimates a high +1.5% q/q growth in Q3 (from a downward revised +1.1% q/q in Q2), supported by private consumption and residential investment as the latter benefits from the constrained supply of existing homes. Our own forecast is less bullish (+0.7% q/q).
Anis Bensaidani
