Why is the services sector slowing?
The manufacturing sector in this country has seen better days and continues to contract, but the services side of the economy, which is a much larger part of our economy today, rebounded in October after hitting a three-year low in September. The index saw improvements for new orders as well as employment, which increased 3.3 points from a five-year low in September.
Moral of the story: Services sectors have been more insulated from the negative impacts of the trade war with China compared to manufacturing sectors but have still been impacted by the slowdown. The ISM non-manufacturing index six points lower than its cycle highs last year.
And why is productivity falling?
Productivity fell in the third quarter, which is the first decline in almost four years – outputs increased 2.1% but inputs (i.e. hours of labor spent on that output) increased faster at 2.4%. In addition to the lower productivity, input costs increased 3.6%. Raises questions when you’re paying more for lower productivity, what is this, United Airlines?
Moral of the story: Productivity is a key source of economic growth and our increasing level of productivity has been a fundamental contributor to the low inflationary environment that businesses have been able to enjoy for a while. But business investment is a huge driver for productivity, but the pullback in business investment because of the China trade war is finally starting to translate into productivity losses.
The trade war with China
It would be remiss to blame the trade war with China to weakness in services growth and productivity without giving you an update on rollercoaster ride of emotions related to the China trade war this week. Things were looking up as optimism on a resolution helped boost markets earlier this week. Then on Thursday, a spokesperson for the Chinese Commerce Ministry said that the US and China had agreed to roll back existing tariffs.Then in an unsurprising turn of events on Friday, President Trump said no such agreement had been reached.
Moral of the story: A “phase one” deal was supposed to be signed by Trump and Xi in Chile later this month but the event was canceled due to protests. Trump has suggested a new location for the signing – Iowa – I’m guessing in front of a pile of soy beans. Regardless of location, really ready for this deal to be signed and this conflict to be behind us, I’m so incredibly tired of talking about it.