US Composite PMI Slumps as Factory Output Shrinks, Case for Fed Pivot Grows

US PMI KEY POINTS:

• Flash U.S. Composite output index falls to 47.3 in October from 49.5 in September
• Services PMI slumps to 46.6 from 49.3, versus 49.2 expected
• Manufacturing activity sinks into contractionary territory, sliding to 49.9 from 52.00 previously

Most Read: US Dollar Technical Analysis for the Days Ahead

U.S. business activity remained negative, but deteriorated further this month, according to preliminary results from the S&P Global Purchasing Managers’ Index survey. The group’s latest report showed that its Flash Composite PMI, which tracks trends in both the manufacturing and services sectors, slumped to 47.3 in October versus 49.2 expected, following an outturn of 49.5 in September, a sign that demand conditions continue to worsen amid tightening financial conditions. For context, any figure below the threshold of 50 indicates contraction, while readings above that level denote expansion.

Looking at the survey’s components, manufacturing PMI sank to 49.9 from 52.00, entering contractionary territory for the first time in more than two years and reaching its lowest mark in 28 months, dragged down by a large drop in new orders. Meanwhile, activity in the services sector, where most Americans work, plummeted to 46.6 from 49.3 on the back of reduced client demand tied to elevated inflation and higher interest rates.

Source: DailyFX Economic Calendar

Today’s results suggest that economic weakness is gaining momentum at the tail end of the year, raising the likelihood of a GDP contraction in the fourth quarter of 2022. Although the economy has been extremely resilient, recessionary winds are starting blow harder, bolstering uncertainty in financial markets.

While the increased recession risks are not cause for celebration, there is a silver lining to the dismal PMI numbers: they may prompt the Fed to adopt a less hawkish bias, possibly at its next meeting, with several policymakers, such as Mary Daly, already calling for the central bank to begin slowing the pace of interest rate hikes in the future. If the latter scenario plays out, the U.S. dollar may begin to top out in the coming months before a possible bearish reversal in 2023.

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—Written by Diego Colman, Market Strategist for DailyFX