The January Markit US manufacturing and services composite index fell to 50.8 from 57 with most of the decline driven by a nearly 7 pt decline in services to just above 50 at 50.9. Manufacturing slipped 2.7 pts to 55. Markit is blaming the supply side and omicron for the weakness.
Specifically with services Markit said, “labor shortages, employee absences and the omicron wave reportedly weighed on growth.” They said the demand side hung in pretty well but did moderate. “Demand conditions held relatively firm, however, as new business rose strongly. The rate of growth was the softest for four months, but was broadly in line with the series average. New business from abroad expanded for the 3rd month running.” Employment rose “at a modest pace.” Backlogs fell to the “slowest since May 2021.”
With respect to pricing, on the input side it fell to the slowest in almost a year but “the uptick in costs was linked to supplier price hikes and soaring wage bills.” And notwithstanding the moderation in input prices, “Relatively firm demand conditions allowed companies to pass-through some input cost increases, as the rate of charge inflation accelerated to a series high.” Inflation and covid resulted in business confidence for service providers to fall to a 3 month low.
On the manufacturing front, “new order growth slowed to the softest rate since July 2020. Alongside labor and material shortages stymieing the upturn, firms noted that customers were keen to reduce spending amid sharp hikes in costs.” With the capacity side, “supply chain issues abounded, which further hampered production and weighed on client demand.” Specifically on prices, “The rate of cost inflation eased again in January and was the slowest since May 2021. Although still marked overall, there were signs of pressure waning. Similarly, the pace of charge inflation softened and was the least marked since April 2021.” The inventory build slowed too as did backlogs. With employment, “labor shortages, a high turnover of staff and reports of the non-replacement of voluntary leavers led to the 1st decline in manufacturing employment since July 2020.” There was an increase in optimism as confidence for the coming quarters rose to the highest since November 2020 “amid hopes of stable supply flows and a reduction in the impact of covid.”
Bottom line, omicron has hurt the supply side, both supply chains and labor, much more than the demand side but hopefully with omicron essentially going away in the coming month, that will ease but what then will it be with demand?
US PMI
In the search for a short term market bottom, the 14 day RSI in the SPX is at the lowest since late February 2020 at 22. The 7 day RSI is at just 9. It got to 8 on February 28th 2020.