Stocks May Fall with the U.S. Dollar as PMI Data Fuels Recession Fears
Stocks May Fall with the U.S. Dollar as PMI Data Fuels Recession Fears
By:Ilya Spivak
The markets fear that failing U.S. economic strength may bring on global recession
- S&P Global PMI data showed the U.S. economy slowed to near-standstill in February
- Weakness in the service sector looks especially ominous despite manufacturing uptick
- Stocks may fall further with yields and the dollar amid building global recession fears
The global economy is losing the last line of defense against the onset of recession. That’s the message emerging out of sobering purchasing managers index (PMI) data from S&P Global that showed U.S. economic activity growth nearly stalled in February. The pace of expansion slowed sharply to the weakest in 17 months.
Perhaps most ominously, the weakness came from the mission-critical service sector. The PMI gauge tracking its performance fell below the “50” boom-bust level separating expansion from contraction for the firs time in 25 months. New orders growth fizzled, and business sentiment soured, reflecting “uncertainty [about] government policies.”
PMI data warns that U.S. economic strength is unraveling
Manufacturing activity picked up a bit, accelerating for a second month after launching sharply higher in January. This month’s result marks the fastest growth since June 2024. The PMI report struck a cautious tone however, warning that part of this strength reflected the front-running of tariffs and so appeared to be temporary.
All the same, it is the service sector that matters most because of its outsized contribution to U.S. employment and overall economic growth. At close to 70% of overall gross domestic product (GDP), it far outweighs the impact from manufacturing and agriculture. Demand dynamics after the COVID-19 pandemic have seen it dominate still further.
The latest consumer price index (CPI) data from the Bureau of Labor Statistics (BLS) reveals two critical insights. First, that 2.62 percentage points (ppt) of January’s 3% year-on-year inflation rate was contributed by core services, while the goods side shaved off 0.03ppt. This implies that demand is overwhelmingly skewed to the service sector.
Stocks and the U.S. dollar may fall as global recession worries build
Second, despite accounting for a dominant 87% of January’s headline CPI reading, services’ contribution declined from 93% in the prior month and marked the lowest share of the total since April 2023. This echoes the message on display in the PMI report, warning that the indispensable engine powering U.S. economic growth is misfiring.
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In turn, this means that global recession risk is building. Throughout the second half of 2024, the U.S. stood alone as a pillar of economic strength while the other major drivers of worldwide growth – the Eurozone and China – slumped toward standstill. They remain there still, even as the U.S. converges on their weakness.
Financial markets offered a telling response last week. Stocks fell alongside Treasury yields and the U.S. dollar while bonds, gold, and the perennially anti-risk Japanese yen recorded potent gains. Analytics from Citigroup warn that U.S. data outcomes now tend toward underperformance relative to forecasts, warning more of the same is ahead.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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