Business leaders report first output contraction since 2020 as consumers swell
Executives have reported the largest drop in business activity since the spring of 2020, according to Friday’s release from S&P Global.
S&P Global’s latest Purchasing Managers’ Index (PMI), which tracks changes reported by business leaders in their companies’ production, fell from 52.3 in June to 47.5 in July, with readings below 50 indicating contraction territory. The slowdown is happening to “a degree we haven’t seen outside of COVID-19 lockdowns since 2009.”
“The recession was driven by a sharp drop in service sector activity, although production at manufacturers also declined slightly, falling for the first time in more than two years,” S&P Global said. Firms noted that weak demand conditions resulted from severe inflationary pressures and hikes in interest rates, which added to the pressure on domestic customer spending. Foreign customer demand also weakened, causing new export orders to decline for the second month in a row.
The Consumer Price Index (CPI) rose 9.1% between June 2021 and June 2022, while the Producer Price Index (PPI) rose 11.3% over the same period, according to data from the US Bureau of Labor Statistics. A recent survey by the National Federation of Independent Business found that 34% of small business owners describe inflationary pressures as the “single most significant problem” — the highest level since 1980.
Similarly, S&P Global said companies are facing “rising input costs for suppliers, as expenditures on fuel, transportation, raw materials and wages have risen even more,” causing many companies to raise prices they charge consumers. In fact, energy prices have risen since the start of the year, while labor shortages due to low labor force participation — the percentage of people who have a job or are actively looking for a job — have exacerbated inflation as companies struggle to find employees.
“Manufacturing has stalled and the services sector’s recovery from the pandemic has been reversed, as the tailwind of pent-up demand has been overcome by rising costs of living, rising interest rates, and growing gloom about the economic outlook,” S&P Global Market Intelligence said Chris Williamson, chief business economist at Intelligence. He added that moderation in demand “helped mitigate inflationary pressures”, although supply problems persisted.
Biden administration officials are seeking to expand semiconductor supplies — a move that could lower the cost of cars and manufacturing equipment. The United States accounts for 12% of the global semiconductor industry and 25% of global semiconductor demand, according to Radford University management professor Zachary Collier.
Earlier this week, Treasury Secretary Janet Yellen traveled to South Korea and other Asian allies to discuss boosting trade in the semiconductor sector. Referring to “real concerns” about China’s willingness to cut trade, Yellen explained: “Resilient supply chains mean diversifying our sources of supply and eliminating as much as possible the possibility that geopolitical competitors will be able to manipulate us and threaten our security.” Relationships with competing nations.
Lawmakers have proposed a $52 billion US CHIPS bill – but because the funding has yet to reach chip makers, companies like Intel, TSMC and GlobalFoundries recently issued “public warnings” that they may “downgrade their plans to make semiconductors” in the US, according to US Department of Commerce.