Mixed PMI Data Signals Recession May Still Hit Main Street Small Businesses

For Main Street’s small businesses, the jury’s still out as to whether — or when — a recession will hit.

A spate of recent economic reports underscores a slowdown, while costs are increasing for the firms that power the U.S. economy.

S&P Global said in a Friday (June 23) press release that its Manufacturing PMI (Purchasing Manager’s Index) dropped to 46.3 in June, down from May’s 48.4. The Services PMI slipped to 54.1 from May’s 54.9.

And in the composite reading — an overall picture of business conditions — the latest estimation was 53, down from 54.3 in May.

All the readings are at multi-month lows.

“The question remains as to how resilient service sector growth can be in the face of the manufacturing decline and the lagged effect of prior rate hikes,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement that accompanied the release. “Any further rate hikes will, of course, have a further dampening effect on this sector, which is especially susceptible to changes in borrowing costs.”

The Friday release comes in the wake of the Institute for Supply Management’s report earlier this month that showed that the non-manufacturing PMI slipped to 50.3 in May, down from 51.9 in the previous month. Readings above 50 indicate growth, but it must be noted that the growth is slowing.

The more growth slows, the higher the risk of recession looms.

In recent weeks, we’ve seen other data reports that detail the shift to spending on services. The most recent earnings from FedEx spotlighted a decline in package volume, reflecting that people are opening up their wallets to pay for experiences, likely at the expense of getting goods delivered to their doorstep.

The Read Across

As for the read-across for the Main Street economy, the S&P Global release stated: “Service sector firms registered a quicker rise in input prices at the end of the second quarter. The rate of cost inflation was the steepest for five months, as companies stated that greater wage bills in particular placed further pressure on business expenses.”

If service firms are finding their own inputs rising, the push would be on to boost their own prices, signaling at least some additional wallet strain for consumers (leisure, beauty services, etc.) and even for the other companies that rely on services to keep things humming (accounting, etc.)

The urgency is there. Nearly a third of professional and consumer services companies said they would have no access to additional cash funds, and 17% of professional services firms said the same. A minority of these verticals said they had more than 60 days’ worth of cash on hand.

As business slows, smaller firms on Main Street will have to find ways to offset the cash flow drain tied to that slowdown. In the meantime, the Services PMI remains positive, implying that inflation is still stubbornly in place, and the Federal Reserve may be resolute in its bid to raise interest rates later in the year.

There may not be an official recession in place, but the signals seem to be flashing with regularity.