Business Surveys Share Some Reasons to Be Thankful

With America’s Thanksgiving holiday this week, we are giving thanks for the latest crop of flash purchasing managers’ indexes (PMIs), courtesy of data firm S&P Global. Despite an abundance of speculative headlines, these monthly business surveys (which report the breadth, albeit not magnitude, of growth or contraction, and where readings above 50 indicate expansion) suggest private sector activity in some major developed economies is chugging along—an underappreciated positive, in our view.

UK Budget Fear Overshadows All

Starting in the UK, Chancellor of the Exchequer Rachel Reeves’s Budget has dominated financial coverage we read for months, and it all comes to a head Wednesday. The specifics remain unknown, and though the government has seemingly been walking back some hot-button proposals (the so-called mansion tax reportedly being the latest casualty), we have seen most experts argue tax hikes are inevitable—and that these levies will hurt businesses either directly or by weighing down consumers.^[i]

This chatter has weighed on UK moods based on different measures of sentiment we follow, including research outfit GfK’s latest consumer confidence survey.^[ii] S&P Global’s weaker flash November PMIs are thus right in line with sentiment, in our view. The composite PMI (which aggregates services and manufacturing) fell to 50.5 from October’s 52.2.^[iii] The Services PMI dropped to 50.5 from October’s 52.3, though manufacturing climbed into expansion territory (from October’s 49.7 to 50.2).^[iv] S&P’s Chief Business Economist Chris Williamson blamed the malaise on the Budget, adding economic conditions will remain tough next year “… linked to speculation that further demand-dampening measures will be introduced in the Budget.”^[v]

We think the pessimism is understandable. All the trial balloons and ongoing speculation have stirred uncertainty, which our research shows can discourage investment and spending as businesses wait and see what measures they have to deal with. But Budget uncertainty needn’t automatically derail UK economic growth, according to our studies. Memories may be short, but we read similar takeaways in financial headlines we follow last year. Reeves implemented measures that many commentators we follow warned would knock businesses (e.g., an employer National Insurance Contributions and minimum wage hikes), which took effect this April. Yet as we pointed out last month, after an April dip, the UK services PMI expanded steadily through November. Our analysis has found tax changes create winners and losers, but they needn’t cause economic activity to shrivel. For investors, we think all the talk and dour outlooks pre-price those Budget expectations into stocks. That potentially sets up some relief once clarity arrives Wednesday, though as always, we think short-term market movement is impossible to predict.

Following Up on France

Beyond the UK, we have other evidence political uncertainty doesn’t derail business activity—see France. In October, as a budget impasse led to Prime Minister Sébastien Lecornu resigning—then returning days later—the country’s flash October composite PMI found businesses blaming volatile domestic politics for weaker consumer spending. A month later? S&P Global reported France’s composite PMI rose to a 15-month high of 49.9 from October’s 47.7—indicating fewer businesses contracted.^[vi] Moreover, weakness was concentrated in manufacturing (47.8).^[vii] France’s flash services PMI climbed to 50.8 from October’s 48.0, also a 15-month high and back in expansion.^[viii]

Now, French PMIs have been detached from gross domestic product (a government-produced measure of economic output) for almost three years, based on our review of recent data. Since 2023 began, France’s composite PMI contracted in 29 of 35 months.^[ix] Over that same timeframe, GDP contracted just once in 11 quarters—so we don’t think weak PMIs have translated to falling economic output.^[x] But overall, political uncertainty’s macroeconomic effects tend to be fleeting—which we think is worth keeping in mind whenever harsh rhetoric and warnings dominate headlines, especially with France’s budget still struggling to pass.

Government Shutdown Didn’t Shut Down US Private Sector

America’s record-long government shutdown ended earlier this month, so data anoraks can breathe easy—America’s jobs report, consumer price measure, retail sales, durable goods and GDP will be back soon.^[xi] Whilst we welcome these official data, the widespread handwringing we saw over delayed reports seemed misplaced to us. The world wasn’t ever flying blind given the abundance of private data sources, including PMIs, based on our research.

PMIs don’t reveal the magnitude of growth or contraction, but they do shed light on what businesses are seeing. America’s flash November reading showed ongoing growth, as services registered 55.0 (from October’s 54.8) whilst manufacturing dipped to 51.9 (from October’s 52.5).^[xii] But S&P also reports other details, including employment and prices. The former rose for the 11^th time in the past 12 months, as businesses added headcount to meet improving customer demand.^[xiii] As for the latter, respondents blamed rising prices on tariffs and higher wages, but S&P noted “competitive pressures restrained pricing power and meant selling price inflation remained below recent peaks”^[xiv] We interpret that to mean companies didn’t pass on all higher costs to customers because they didn’t want to lose business (and they could afford the hit).

For investors, we think markets look ahead, and we find they are a beneficial gauge of expected economic activity—not so with backward-looking data, in our view. Recent volatility notwithstanding, US stocks have rebounded alongside global markets after an early-year correction.^[xv] If a big, bad economic downturn loomed, our review of stock market history finds stocks would generally signal trouble first.

These PMIs confirm private businesses remain more resilient than appreciated, in our view, and whilst we doubt that is news to stocks, we think it confirms this global bull market (a long period of generally rising stock prices) hasn’t risen on hot air.