US April Service PMI Falls Short of Expectations

The US service industry survey data for April came in below expectations, with weak economic activity growth and sustained high price pressures occurring simultaneously, signaling stagflation and alerting the market.

The April ISM Non-Manufacturing PMI fell to 53.6 from 54.0, below the market's expectation of 53.7; the S&P Global April services PMI final value was revised down from the preliminary 51.3 to 51.0, both indicating the same direction: demand momentum is weakening, while inflationary pressures are not abating.

New orders have slowed significantly, with the employment sub-index contracting for the second consecutive month, and the input cost price index remains near its cyclical high.

S&P Global Chief Business Economist Chris Williamson stated that the economic growth presented by the survey data is equivalent to a moderate level of GDP growth of about 1% per year. This combination of weakening growth and high prices poses an increasingly difficult policy dilemma for the Federal Reserve.

Demand Wanes Across the Board, New Orders Shrink for the First Time in Two Years

Williamson pointed out in the report that although business activity resumed growth in April after a slight contraction in March, "since the beginning of the year, the growth gears have noticeably downshifted." More concerning is that service sector businesses have reported a decline in new business inflows, the first such occurrence in nearly two years.

He attributed the weakening of demand to the compounding impact of multiple pressures. The most direct impact is in the consumer service sector, where high prices have led to consumers cutting discretionary spending, with holiday travel and leisure activities being the first to suffer. High fuel prices and travel restrictions have also hampered the transportation sector.

The decline in financial service demand forms another line of decay. Williamson noted that the weakness in this area is partly due to the rising uncertainty in market prospects, and is also closely related to market expectations of sustained increases in inflation and interest rates, which have significantly dampened real estate and lending activities.

Price Pressures Continue to Spread, Policy Dilemma Becomes Apparent

On the other hand of slowing growth, price pressures continue to spread widely.

Williamson stated that the further increase in input cost inflation is not only due to rising fuel prices, but also the increase in prices of goods and services is spreading to a broader range of categories, coupled with rising labor costs, "these factors will gradually be passed on to consumer price inflation in the coming months."

The scale of price increases will put pressure on the Federal Reserve, prompting it to take action to prevent high inflation expectations from further solidifying. In this context, the scent of stagflation, with weak growth and high inflation coexisting, still permeates the economic data - this is precisely the most challenging macro combination for central bank policymakers to handle.