DR.CHENJIAZI ZHONG

In Brief

• U.S.: ISM PMI up 2.5% to 58.8; ISM NMI up 1.4% to 55.3; job growth has started to slow, typical in 2H of a business cycle
• Euro zone: Manufacturing sector underpinned solid growth of euro zone economy
• U.K.: Service sector growth slipped to 11-month low
• China: The PBOC halted initial coin offerings
• Second round of NAFTA talks concluded

On the U.S.

The U.S. manufacturing sector, as measured by the ISM PMI, expanded by 2.5% to 58.8 during August 2017, which was its highest reading since April 2011. The PMI has averaged 56.7 for the first eight months of 2017. Four of the five component indices accelerated during August. The increase was attributed to Production and New Orders, with support from Employment and Supplier Deliveries. The Inventories Index, which grew 5.5% to 55.5, indicated that a significant replenishment cycle was starting. This level is difficult to sustain. A key measure of the manufacturing sector is New Orders Minus Inventories. In August, New Orders grew 4.8 pp, which was faster than Inventories did, marking a continued strain on supply chains, as they work to maintain supply-demand balance. In the near term, this is positive as the higher velocity can put pressure on available capacity and may encourage capital investment. The Manufacturing Customers’ Inventories Index decreased 8.0% to 41.0, showing a significant drawdown at the finished goods level. On the other hand, the Prices Index stayed elevated. 16 of the 18 industries reported paying higher prices for raw materials and intermediate goods.

The ISM Non-Manufacturing Index (NMI) grew 1.4% to 55.3, indicating stronger growth in the sector and its key components. While the sector is supporting job growth, it is still underperforming as compared with manufacturing. The accelerating pace in the NMI was led by improvements in Business Activity, New Orders, and Employment. Supplier Deliveries had a minor negative impact on the composite index. In August, pricing pressure strengthened further as the Non-Manufacturing Prices Index indicated higher prices on average with a minor degree of inflation. Concerns over inflation concerns historically begin when the Index exceeds 60 for an extended period.

The U.S. job market slowed down in August, with employers adding a solid but less-than-robust 156,000 jobs and holding back on meaningful pay raises for most workers. The U.S. economy is still steadily generating jobs, although more slowly than it did earlier in its recovery. With the economy now in its ninth year of expansion and unemployment near a 16-year low, fewer people are looking for job opportunities and fewer jobs are being filled. The hiring data for August have yet to account for the damage from Hurricane Harvey, whose economic impact will be felt in coming months as more people will seek unemployment benefits and industrial production will likely reflect the loss of Texas refineries and factories. The unemployment rate was up slightly to a still-low 4.4% from 4.3%. One reason that not many analysts expressed concern about slower job gain in August is that monthly employment reports can be volatile, especially figures for August. Employers are preparing for the start of fall, schools are reopening, and the government cannot always precisely factor those changes into its August employment data.

On Euro Zone

Economic growth in the euro zone remained solid in August, evidenced by the final IHS Markit Euro zone PMI Composite Output Index of 55.7, down only marginally from the flash estimate of 55.8. Output growth so far in the third quarter is slightly below its second quarter high, but it remains among the best seen over the past seven years. August saw a solid expansion of manufacturing production, with the pace of increase regaining most of the momentum. Growth in the service sector activity eased to a seven-month low, but it still remained above its long-term trend.  This, in turn, led to rising backlogs of work, which firms across the euro zone responded to by increasing employment. Employment growth was registered for the 34th month running and, although slower than in July, remained among the best seen over the past ten years. Job creation was strongest in Ireland, Spain, and Germany, while comparatively modest increases were seen in France and Italy. Only Spain recorded a sharper pace of expansion. Price pressures accelerated in August, with rates of increase in output charges and input costs both hitting three-month highs. However, the pace of inflation remained below peaks. Business optimism continued to ease from May’s record high in August. The degree of positivity was the lowest during the year-to-date period, but solid overall.

On the U.K.

The U.K. service providers recorded solid rises in business activity during August, but rates of growth eased from July and remained notably weaker than seen on average in the first half of 2017. At 53.2 in August, the headline seasonally adjusted IHS Markit/CIPS Services PMI Business Activity Index registered above 50.0. However, the index dropped from 53.8 in July and signaled the slowest pace of business activity expansion since September 2016. The rate of job creation accelerated for the third month running to its strongest since the start of 2016.

August data pointed to a sharp increase in average cost burdens at service sector companies. The rate of input price inflation picked up further from May and was the fastest for six months. Higher operating expenses placed pressure on firms to increase their average prices charged in August. The latest rise in service sector charges was the fastest since April. Meanwhile, latest data revealed that service providers’ business confidence edged up to a three-month high, but remained subdued in comparison to those seen prior to the EU referendum last summer.

On China

Bitcoin tumbled as much as 11.4%, the most since July after The People’s Bank of China (PBOC) said initial coin offerings (ICOs) are illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales. The PBOC said on its website September 4 that it had completed investigations into ICOs, and would strictly punish offerings in the future while penalizing legal violations in those already completed. Additionally, those who have already raised money must provide refunds, though the PBOC did not specify how the money would be paid back to investors. Digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies. Digital tokens cannot be used as currency on the market and banks are forbidden from offering services to ICOs.

Second Round of NAFTA Talks Conclude

Canada, Mexico, and the U.S. have concluded the second round of talks on the renegotiation of NAFTA, during which they made progress on consolidating certain proposals into a single text. The talks were held in Mexico City on September 1-5. According to a trilateral statement issued by Canada, Mexico, and the U.S., more than two dozen working groups worked diligently to advance the discussions and exchanged information and proposals. The statement added that, in several groups, these efforts resulted in the consolidation of proposals into a single text. This text will be used in subsequent negotiating rounds. The statement also stressed that all sides share a goal of concluding the renegotiation process toward the end of 2017. The third round of negotiations will take place in Ottawa, Canada, September 23-27.