US economic growth slowed sharply at the start of the fourth quarter, according to the ISM business surveys.
Combined with the disruption from Hurricane Sandy, which is set to hit the economy in November, gross
domestic product (GDP) for the fourth quarter is likely
to come in substantially below the 2.0% annualised
pace seen in the third quarter.
The ISM’s Non-Manufacturing PMI fell from 55.1 in
September to 54.2. Worryingly, the main indicators of activity and demand fell particularly sharply, with the resulting drop in the headline PMI softened by an improvement in the Employment Index. The concern is that unless growth of new business picks up, the employment numbers could fade again in coming months.
The Non-Manufacturing Business Activity Index fell
from 59.9 to 55.4, its lowest since June, while the New
Business Index dropped from 57.7 to 54.8. Both were
below the averages seen in the third quarter, pointing
to a marked slowdown in the vast non-manufacturing
Looking at the two ISM surveys together, the implications are for GDP growth to have weakened in October. The weighted average of the Non- Manufacturing Business Activity Index and Manufacturing Output Index fell from 58.2 in September to 54.9 in October, as the slowdown in the non-manufacturing economy offset an upturn in the
goods-producing sector (where the Output Index rose from 49.5 in September to 52.4).
The drop in the All-sector Output Index points to a deceleration in the pace of US economic growth from
an annualised rate of almost 2.5% in September to just
over 1.0% in October. Combined with the impact of
Hurricane Sandy, the data available so far suggest that fourth quarter growth could come in below 1.0%. However, a rebound in the first quarter of 2013 should be expected as business returns to normal in many
areas and reconstruction work boosts the GDP numbers.
Oddly, given the slowdown in activity and new
business, the non-manufacturing sector took on staff in
increased numbers in October, according to the ISM,
with job creation hitting the highest since March. The upturn helped alleviate a reduced rate of hiring in manufacturing, meaning the composite measure of
employment from the two surveys showed the largest increase in payroll numbers since April.
At 54.4, up from 51.7 in September, the All-sector
Employment Index is running at a level consistent with
non-farm payroll growth of just under 200,000 per
month, which broadly tallies with the latest official data
showing a 171,000 increase in October. It seems
unlikely that this rate of job creation can be sustained, however, given the easing in growth of new business seen in the non-manufacturing survey.