US economy continues to weaken; Downturn in the euro zone eases slightly

By Lucia Mutikani and Jonathan Cable

WASHINGTON/LONDON (Reuters) – U.S. business activity contracted for a fifth straight month in November as higher interest rates dampened demand, but the contraction in euro-zone business activity eased slightly as the world braced itself for a recession-hit year prepared, polls showed on Wednesday.

S&P Global said its flash US composite PMI output index, which tracks manufacturing and services, fell to 46.3 this month from last reading 48.2 in October. A reading below 50 indicates a contraction in the private sector.

Activity is collapsing under the weight of the Federal Reserve’s most aggressive rate-hiking cycle since the 1980s, aimed at containing inflation by dampening economic demand. On the Fed’s preferred measure, inflation is still more than three times its 2% target.

The flash composite index of new orders fell to 46.4, its lowest level in two and a half years, from a late reading of 49.2 in October. Outside of the first wave of the COVID-19 pandemic, this was the worst reading since 2009.

“Companies are reporting increasing headwinds from rising living costs, tightening financial conditions – particularly higher borrowing costs – and weaker demand in both domestic and export markets,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

A Reuters poll of economists last week showed a 60% chance of a US recession within a year, and the Fed is poised for a 50 basis point hike at its next policy meeting in three weeks as the battle to contain the high inflation continues.

Meanwhile, the euro-zone business slowdown eased slightly in November, offering a glimmer of hope that the expected recession there may be shallower than feared, but consumers cut spending amid a cost-of-living crisis.

Evidence is mounting that the bloc is entering a recession, and in a Reuters poll released Tuesday, economists gave it a 78 percent chance of hitting a recession within a year.

S&P Global’s Flash Composite Purchasing Managers’ Index (PMI), considered a good indicator of overall economic health, rose to 47.8 from 47.3 in October, beating expectations of a decline to 47.0 in a Reuters Opinion poll.

However, November is the fifth month that the index has been below the 50 mark, which separates growth from contraction.

“Today’s PMI data continues to show that the eurozone has entered recession, with surveys pointing to a milder contraction compared to previous recessions,” said Paolo Grignani of Oxford Economics.

The slowdown in German economic activity also moderated in November, a sister survey showed, raising some hopes that the expected recession in Europe’s largest economy could be milder than initially feared.

In France, however, activity fell for the first time since February 2021 as lower orders weighed on the eurozone’s second-largest economy.

In the UK outside the European Union, economic activity in November fell at the fastest pace in nearly two years, increasing signs of a recession there.

DECREASE IN PRICE PRESSURE

Elsewhere in the reports, there were some glimmers of hope in the fight against inflation, although there are signs that price pressures will gradually slow and wages will remain flat for the time being.

In the United States, the survey measure of the prices paid by firms for inputs slipped to 65.7 from a final reading of 67.0 in October, the lowest level since December 2020, reflecting an easing of supply constraints.

Companies also increased prices for their products at the slowest pace in just over two years, partly due to slowing demand.

The survey’s Flash Manufacturing PMI fell to 47.6 this month, its lowest since May 2020, with new orders remaining subdued, but pricing pressures eased further as manufacturers signaled the first improvement in supplier performance since October 2019. Average input prices also rose at the weakest rate in two years, but factories still faced the challenge of finding skilled workers.

The survey’s flash services sector PMI slipped to 46.1 from 47.8 in October. The service companies also reported weak demand and moderate purchase prices.

A similar trend emerged in the eurozone. New orders fell sharply again and price pressure eased significantly, with the producer price index falling to 63.7 from 66.1, the lowest level since March 2021.

Nonetheless, inflation in the region remains unacceptably high. Last month it hit 10.6%, more than five times the ECB’s 2% target, and the central bank is expected to add another 50 basis points to its deposit rate next month, denying any sign of easing price pressures from policymakers decision-makers is welcomed.

Activity in the bloc’s dominant services industry fell again, with the headlines index hitting a 20-month low of 48.6 in October. Despite the ongoing slowdown, companies have increased their headcount, albeit at the weakest pace since March 2021.

Manufacturing activity, which was particularly hard hit by rising energy prices and disrupted supply chains, also declined, but at a slower pace. The main index rose to 47.3 from 46.4, beating Reuters survey estimate of 46.0.

“Input and output price indices fell, consistent with other evidence that headline inflation is about to peak,” said Jack Allen-Reynolds of Capital Economics.

“But they’re both still extremely high, with service companies in particular reporting that rising wages are pushing costs up.”

(Reporting by Lucia Mutikani, Jonathan Cable and David Milliken; Writing by Lindsay Dunsmuir; Editing by Chizu Nomiyama)

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