I've talked before about the post Covid Crash catch-up, as demand for services has boomed since the beginning of the year. The chart below shows the manufacturing PMI vs the services PMI for the Big 8, and you can see the record gap.
Services normally follow manufacturing, and services normally have a smaller cyclical swing than manufacturing, creating a larger gap at recession lows. But the gap that's developed now is unprecedented.
With services holding up the economy, it has become less responsive to rises in interest rates. Yes, manufacturing is in recession and getting deeper, but the overall economy is OK. Will Central Banks have to raise rates further to bring inflation back under control? There has to be a serious possibility that that will happen. The PMI sub-indices and commentary show falling inflation in manufacturing, but not in services.
This unprecedented overall whole-economy lack of response to tightening means, I think, that CBs will raise rates too high (in my opinion, they already have) and then, services will snap back to manufacturing. At which point overall GDP will plunge.
Very interesting situation. This is the first time in my nearly 50 year career in economics and funds management that this has happened. Covid continues to screw up economic relationships.
At any rate, I'll be watching the trajectory of services PMIs very closely.
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