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The economic data is looking steadily worse

Just when investors were coming to terms with the woes in the US manufacturing sector, the services sector starts to slip too. John Stepek explains what's going on.

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Market data from the US is worrying investors

Yesterday, I was talking about how the woes in the manufacturing sector are not necessarily a sign that everything is turning pear-shaped.

I pointed out that these days, manufacturing while important is tiny compared to the services sector.

Consumers, and the US consumer in particular, are what matters most for economic growth.

That's all true.

Trouble is, the services sector is now looking decidedly peaky too...

The services sector is looking ropey too

The Institute for Supply Management's non-manufacturing index (that's the services sector), fell to 52.6. That's above the key 50 mark, which means the sector is still growing. But it was a lot worse than analysts had expected.

As Bloomberg reports, we've also seen weak construction data, and rubbishy vehicle sales figures this week.

In short, it's starting to look decidedly dodgy out there.

How did the market react? It went up, of course. With a string of such weak data, it becomes a lot harder for the Federal Reserve to avoid cutting interest rates. That's one interpretation. The other is that markets simply bounced because they'd fallen quite hard in the previous two days.

The big news, of course, this afternoon is the US non-farm payrolls data. The problem is though, I don't think this is going to tell us much of any use. And I'm not sure the market's cheerful approach to "bad news means rate cuts" will last the month.

The uselessness of the non-farm payrolls report

But those are critiques you can make every month. This month it's going to be particularly unhelpful. Why?

Well, if the data comes in better than expected, it doesn't actually tell us very much. Bears can say: "Ah, but this is a lagging indicator and this came before all the much more recent data that tells us the economy is slowing." And they're right.

If the data is worse than expected, it rattles the horses, but it really just confirms their current worst fears. Markets might have bounced on the hope of a rate cut yesterday, but I suspect that investors already believe that the Federal Reserve is way, way behind the curve on this one.

They don't have faith in Fed chief Jerome Powell's ability or desire to act aggressively to stop a recession. (In other words, they think it'll take a lot worse to get him to consider more money printing or hefty rate cutting from here.)

The tricky thing is that the non-farm payrolls data also often sets the market's "tone" for the month. The jobless data gives you an idea of what the market is going to be stressed about, right up until the next Fed meeting (the next one is at the end of October).

So whatever the outcome of this jobs report, investors gripped by recession fear are going to be extra sensitive to every new economic data release that comes out of the US. Not to mention every word that comes out of a Fed member's mouth.

As I said yesterday, none of this means you should make any big changes to your investment plans. But it's just worth being psychologically prepared for lots of headlines about pending recession, and for lots of one-day dives in markets on both sides of the Atlantic. The fact that it's October, the classic month for big crashes, will only serve to ramp up the melodrama.

Now seems like as good a time as any to remind you to book your tickets for the MoneyWeek Wealth Summit we've got some of the brightest minds in finance and investment lined up to analyse the threats and opportunities for investors presented by this extremely unusual environment. If you haven't booked yet, I'd urge you to come it might be one of the best investments you make this year.

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