Services Surveys Signal Stagflation As Firms Increasingly “Pass On Higher Costs To Clients”

Following the stagflationary signals from this week’s Manufacturing survey data, ISM and Markit were expected to show further gains in the Services sector even as the ‘hard’ data continues to serially disappoint, and both surveys significantly beat expectations, rising to new record highs…

Source: Bloomberg

The data was, for once, in somewhat of an agreement – though Markit respondents are notably more excited than ISM’s…

• Markit US Manufacturing up in May to 62.1 – a record high

• Markit US Services up in May to 70.4 – a record high

• ISM US Manufacturing up in May to 61.2 – well below the March highs

• ISM US Services up in May to 64.0 – a record high

Source: Bloomberg

Markit notes that service providers stepped up their efforts to pass on higher costs to clients, with the pace of charge inflation quickening to the steepest in the survey’s history.

Companies mentioned that greater costs were being progressively passed through to customers amid burgeoning demand.

Stagflation fears persist as ISM notes that similar to the group’s manufacturing survey, the report showed elevated price pressures, growing order backlogs and softening in the pace of hiring.

Limited availability of both materials and skilled workers risks tempering the pace of economic growth.

The US Composite PMI posted 68.7 in May, up from 63.5 in April, to signal the steepest upturn in business activity since data collection began in October 2009.

Once again, inflationary pressures intensified in May.

The rate of cost inflation was unprecedented amid substantial supplier shortages and delays. As a result, firms sought to pass on greater costs to their clients, with the pace of charge inflation quickening to a new series high.

US Composite PMI is leading the world…

Source: Bloomberg

Commenting on the latest survey results, Chris Williamson, Chief Business Economist at IHS Markit, said:

“The US economic recovery shifted up a gear in May, with output of the combined manufacturing and service sectors surging past all prior peaks by an impressive margin.”

The strong correlation between the PMI and GDP means the economy looks set to enjoy rapid – potentially double-digit – growth in the second quarter:

“Further robust expansions are indicated for the summer months, with an improving order book situation accompanied by elevated levels of business confidence and the further easing of virus restrictions both at home and abroad.”

But, Williamson warns: “the survey’s price gauges have also climbed to unsurpassed levels, which will add to inflation worries. These unprecedented output and price growth rates will inevitably lead to speculation about an earlier than previously expected tapering of Fed policy.”