U.S. business activity still soft in early 2023, but outlook perks up

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NEW YORK, Jan. 24 (Reuters) – U.S. business activity contracted for a seventh straight month in January, though the downturn in both manufacturing and services moderated for the first time since September and business confidence rose as the new year began.

At the same time, however, an S&P Global survey on Tuesday found that price pressures have increased for the first time since last spring, indicating that inflation is far from being slick despite the US Federal Reserve’s aggressive moves to contain it. That increases the chances the US central bank needs to keep up the pressure through higher interest rates, including at next week’s first policy meeting of the year.

S&P Global’s Flash US Composite Output Index rose to 46.6 in January – with readings below 50 indicating contraction in activity – from a final reading of 45.0 in December. While that was the highest in three months, companies still reported that demand was weak and high inflation was a headwind to customer spending.

On the manufacturing side, S&P Global’s flash Manufacturing PMI came in at 46.8 this month, up from 46.2 in December and higher than the median estimate of 46.0 in a poll of economists by Reuters.

In the huge services sector, which accounts for two-thirds of US economic output, the rate of contraction slowed from 44.7 last month to 46.6 in January. That also beat the average estimate in the Reuters poll of 45.0.

Meanwhile, measures of input prices for both service and goods manufacturers rose month-on-month for the first time since May.

“The concern is that not only has the survey shown a downturn in economic activity at the start of the year, but that input cost inflation has accelerated in the new year, linked in part to upward wage pressures, which could lead to a further aggressive tightening of Fed policy despite rising recession risks,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.

Last year, after slowly acknowledging that rising inflation was not the transient phenomenon it had hoped for, the Fed raised its reference rate from near zero in March to a range of 4.25% to 4.50% in December. It was the most aggressive monetary policy tightening since the 1980s and aimed to bring inflation back to the target of 2% per annum.

After peaking at 7% in June, inflation had fallen to 5.5% in November by the Fed’s preferred measure. That metric — the personal consumption expenditure price index — will be updated for December later this week, and while it’s moderated further over the past month, it remains far too high for the likes of Fed officials meeting next week on Jan. 31. . . 1. Another quarter of a percentage point increase is expected on the way to a policy rate that officials see rise above 5% this year.

The S&P Global survey is the latest indicator to show that the US economy is cooling – largely in response to the Fed’s rate hikes – but whether it will slip into recession remains an uncertain issue. Even as consumer demand for goods cools significantly as interest rate hikes by the Fed make purchases such as homes and motor vehicles more expensive, other indicators point to demand for services remaining firmer.

In addition, the US labor market remains tight, despite growing anecdotal evidence that companies are hiring and, in some cases, firing workers. There was little increase in unemployment benefits as the new year began, and the national unemployment rate stood at 3.5% in December, back to the lows of half a century just before the pandemic.

The S&P Global survey’s forward-looking indices showed improved confidence in the outlook, indicating that companies expect the situation to improve later in the year.

“The uptick in positive sentiment was broad-based, with companies hoping for a rebound in customer demand as 2023 progresses,” the company said.

Reporting by Dan Burns; Edited by Chizu Nomiyama

Our Standards: The Thomson Reuters Principles of Trust.

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