IHS Markit US Business Outlook Reflects Inflationary Pressures on Supply Chains

The latest IHS Markit Business Outlook survey indicated that business optimism among US private sector firms weakened in October and fell below the historic series average. At +31%, the net balance of companies anticipating greater output over the coming year dropped from +46% in June.

Although below the series long-run trend, the net balance was the joint-second- highest since October 2018. Softer forecasts regarding business activity were seen across both sectors, as both manufacturers and service providers noted reduced confidence. Goods producers registered the weakest expectations regarding future output.

Opportunities for growth reportedly stemmed from hopes of further upticks in client demand as key markets reopen. Nonetheless, businesses stated that domestic demand remained strong, with opportunities for further expansion at home as well. Some companies noted that potential output growth may come from their ability to secure materials, as competitors struggle to fulfil their order requirements and clients look elsewhere. Those in the service sector also mentioned that looser COVID- 19 restrictions and greater customer confidence in safety measures will support higher business activity.

Businesses continued to highlight challenges around the outlook, however. Weighing on overall confidence were factors which may hinder any expansion, such as US business activity expectations severe supply chain disruption, cost inflation, and labor and raw material shortages.

Many firms noted that until there is greater stability across supply chains, pressure on production capacities will build.

Employment & Investment Plans

US private sector companies signalled a reduction in confidence regarding an increase in employment over the coming year since June. Weaker expectations were seen across both the manufacturing and service sectors, as firms frequently mentioned ongoing labor shortages and challenges finding suitable candidates for current vacancies. At +19%, the net balance of firms anticipating a rise in workforce numbers was down from +28%, but in line with the long-run series average.

In line with expectations regarding employment, investment forecasts weakened in October. In fact, the net balance of firms anticipating a rise in R&D spending turned negative for the first time since data collection began three years ago. Capital expenditure forecasts also softened from that seen in June, although remained optimistic overall. The net balance of companies that foresee a rise in capex spending fell to the lowest since June 2020.

Inflation Expectations

Input cost inflation expectations strengthened in October, as the net balance of firms anticipating higher staff and non-staff costs rose. The former reached the highest since composite data collection began three years ago. Forecasts for input prices were overwhelmingly driven by raw material and labor shortages.
Concurrently, the net balance of companies anticipating higher output charges picked up to a fresh series record. Manufacturers and service providers alike registered the strongest expectations regarding increased output prices in 12 years of data collection.

Corporate Earnings

Although companies generally anticipate higher output charges, the net balance of firms that foresee increased profitability dropped to the lowest in two years.

“US private sector firms registered a reduction in business optimism regarding the outlook for output over the coming year in October,” says Siân Jones, Senior Economist at IHS Markit. “Although hopes of a further uptick in client demand and the reopening of markets due to looser COVID-19 restrictions drove confidence, labor and material shortages weighed on expectations.”

He adds that, sadly, employment expectations weakened as concerns over finding suitable candidates for vacancies intensified. Less robust profitability forecasts were reflected in lower confidence in investment spending, with R&D expenditure expected to fall slightly over the coming year.

“Inflationary pressures are expected to build further over the coming 12 months, as the net balances of firms anticipating higher staff costs and output charges reached fresh series records. Raw material shortages are also forecast to push up non-staff costs,” concludes Jones.

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