GDP Stalling and Inflation Still Soaring: ‘Bout of Stagflation’

US President Joe Biden departs the White House in Washington, DC, on July 6, 2022. - President Biden travels to Ohio to speak about the American Rescue Plan. (Photo by Samuel Corum / AFP) (Photo by SAMUEL CORUM/AFP via Getty Images)
Photo by SAMUEL CORUM/AFP via Getty Images

The growth of the U.S. economy appeared to stall at the end of the second quarter as both services and manufacturing weakened, S&P Global said Tuesday.

S&P Global’s barometer of business activity in the services sector fell to 52.7 in June from 53.4 a month earlier. This is the third consecutive monthly decline and the weakest reading since January. Notably, businesses reported a decline in new business for the first in almost two years.

Last week, S&P Global said its gauge of manufacturing declined sharply to 52.7 in June from 57 in May. That was the lowest reading in two years.

The composite index fell to 52.3 from 53.6, the weakest since January. The composite index has been above 50—the level dividing expansion from contraction—for two years.

“June saw signs of a broad-based weakening of the economy with demand now falling in both the manufacturing and service sectors. While the survey data point to a stalling of GDP at the end of the second quarter, a downshifting in the forward-looking new orders index and drop in companies’ future output expectations hints at falling economic activity as we head through the summer,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

High prices are sapping demand for both goods and services. The financial services sector has been hurt by the decline in stock and bond prices.

“Demand for goods and services from households is showing signs of moderating substantially due to the rising cost of living. Meanwhile, tighter financial conditions are starting to hit, and it was notable that the service sector slowdown was led by a steep drop in financial services activity,” Williamson said.

Service providers continued to hire in June to support growth of activity and fill previously vacant positions. Payrolls grew sharply despite complaints from companies about finding suitable workers, S&P Global said.

Businesses are increasingly worried about the sustainability of customer demand. S&P Global recorded a sharp drop in confidence regarding activity over the coming year. Sentiment fell to the lowest reading since September 2020.

Inflation eased for the second straight month to the softest since September. Some businesses reported reducing prices or holding them down to stimulate business despite weak demand.  The rate of input cost inflation slowed from May’s survey record, but was still among the fastest since the series began in October 2009. Higher wages were one of the main drivers of rising prices input costs in the latest survey period. Rising fuel prices were also widely mentioned. Fifty-six percent of respondents signaled a rise in input costs over the month.

“Meanwhile there was welcome news in terms of a marked easing in upward price pressures, but it’s clear that price growth remains elevated despite coming off recent peaks, all of which points to a bout of stagflation in the near term,” Williamson said.
The Institute for Supply Management’s index of services slipped to 55.3 from May’s 55.9, according to data released Wednesday. In contrast to the S&P Global survey, it showed employment contracting in June and new orders expanding, albeit at a slower pace than earlier this year.

“Consumers are shifting purchases away from our discretionary products to essentials. Inflation is definitely taking a bite from our sales, and mall traffic is far below the norm, potentially due to inflation, a need for more disposable income on essentials and less willingness to drive to malls. E-commerce sales will be going up again,” a retailer commented to ISM.

Someone in public administration complained that businesses were raising prices “under the guise of inflation,” a comment belied by the widespread reports of still-rising input costs.

“It seems like everyone is jumping on the bandwagon (of) raising prices under the guise of inflation, cost of energy and shortages. Costs on even software renewals have gone up between 5 and 10 percent. This is getting out of control, and we need to be diligent in researching the cause of rising prices on every transaction,” the commenter said.

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