Economically weighted ISM indexes for October show a broader, but even more inflationary, expansion

 

 - by New Deal democrat

I think if I ever decided to cut back my online writing about the economy to the bare bones, it would be two posts a month. The first of the two posts would be this one, because the economically weighted ISM manufacturing + services indexes continue to be the best timely snapshot of the US economy, and the former in particular has an 80 year history (the latter about 25) of being accurate. The second post would be at the end of the month to see how well the other economic data confirmed this average - and while it would be noisy, I would expect it to be largely on target, especially over a three month period.

With that introduction, last week the manufacturing sector for October showed expansion across the board, with a heavy dose of inflation. This morning the services index was updated to the same effect with the slight exception of employment. A reminder that the weighting, based on their impact on the economy, is 25% manufacturing and 75% services. Further, to cut down on monthly noise, I particularly look at the three month averages.

To the numbers: the headline services index declined -0.5 to 54.9 [recall that any number over 50 indicates expansion]. The three month average was 54.8. Since the three month average for manufacturing was 54.9, the economically weighted average was 54.8, a declne of -0.2 from last month [note: in all of the graphs below, the manufacturing number is blue, and services gray]:

New orders declined -1.1 to a still strong 59.8. The three month average was 59.3. The three month average for manufacturing was 55.2, so the economically weighted of this most forward looking component was 58.3, an increase of 1.1 from September:

The relatively punk metric in these indexes has been employment, which has been in contraction for over a year. This month it improved all the way to slightly above neutral, as the services employment subindex rose +2.3 to 50.1. The three month remained contractionary, however, averaging 48.4. Since the manufacturing employment subindex average was 52.2, the economically weighted average was (slightly) below 50 for the third month in a row as well, unchanged at 49.4:

Importantly, although it has been better than summer of last year, the ISM weighted average has only shown expansion in two months this year - February and June - in contrast with the generally positive monthly jobs reports. It is possible that this difference is because these are diffusion indexes, so if slightly less than 50% of industries are hiring, the ISM average would be negative, while if the net actual hiring was more focused on the expanding industries, the nonfarm payrolls number would be positive. 

Finally, widespread price increases not only continue to be a problem, but they appear to be worsening, as the prices paid index for services rose +1.4 to 74.0, its highest number in over two years, with the three month average rising 2.1 to 72.3. The three month average for manufacturing rose further this month to 73.4 so the economically weighted average increased 0.2 to 72.6:

This has become almost as bad as during the post-pandemic inflation, with the worst reading since mid-year 2022 (note that unlike the other three graphs, this one shows the last five years for better comparison).

In sum, the economically weighted ISM averages indicate that as of now, the economy remains in reasonably strong expansion. Further, the very positive new orders indexes suggest it might get even stronger. This appears to be bringing along employment, which is essentially neutral and on the cusp of turning (slightly) positive. But along with the increased demand, inflationary pressures are also becoming even stronger; and if inflation is becoming even more widespread at the producer level, can consumer inflation be far behind? Maybe I should call this an even more inflationary even broader expansion.

Weekly Indicators for September 28 - October 2

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

When looking at the economy, you have to put your ideological priors aside. Most of us feel that T—-p is inevitably going to crash the economy, in between his stupendous incompetence and mafia bust-out tactics. But when the data say that isn’t the case, at least not at present, you must listen to the data.

And the data says that the economy is expanding, rebounding from its brush with recession last year. With the very major qualification that the expansion is also quite inflationary (a consequence of the bust-out fiscal policies).

By clicking over and reading, you can bring yourself thoroughly up to date as to all of the gory details, and reward me with a penny or two for collecting and collating the data for you.

September jobs report: a weakly positive report consistent with an inflationary expansion

 

 - by New Deal democrat

For most of this year my Big Theme has been that the AI Boom (or possibly bubble) has been counterbalancing a stagnant or even shallowly recessionary rest of the economy. In the last few months that has moved towards the economy being in an inflationary expansion, including a slight pick-up in employment and downward drift in unemployment.

This month came in at the weak end of that range.

Below is my in depth synopsis.

HEADLINES:

• +29,000 jobs gained. Private sector jobs increased 46,000, while government jobs declined -17,000. The three month average declined to +47,000.
• The pattern of downward revisions to previous months reappeared this month, as July was revised lower by -43,000, and August was also revised lower by -17,000 for a total decline of -60,000.
• The alternate, and more volatile measure in the household report, rose sharply for the second month in a row, by +406,000 jobs. But on a YoY basis, this series which had been negative for six months in a row before last month, turned negative again and is now lower by -504,000.. 
• The U3 unemployment rate rose +0.1% to 4.2%. This was the result of rounding, as the rate carried one further deimal point rose from 4.14% to 4.17%.
• But the U6 underemployment rate declined another -0.2% to 7.5%, its lowest in over 18 months.
• Further out on the spectrum, those who are not in the labor force but want a job now rose +43,000 to 5.790 million, still close to the bottom end of its recent range.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn vs. rebounding. These were mainly positive for the third month in a row.

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.3% to 42.0 hours, the highest reading of this entire post-pandemic expansion.

• Manufacturing jobs rose +9,000, the 6th increase in the last 12 months.
• Truck driving reversed its recent decline for the third month in a row, increasing by +2,600.
• Construction jobs rose +11,000.
• Residential construction jobs, which are even more leading, rebounded their recent 3 year low, up +3,000.
• Goods producing jobs as a whole rose +18,000. 

• Temporary jobs, which had declined by over -650,000 since late 2022, but has reversed higher most of this year, declined by -10,900.
• The number of people unemployed for 5 weeks or less rose +98,000 to 2.098 million, still low compared with the last 3 years.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.07, or +0.2%, to $32.60, for a YoY gain of +3.3%. Except for July’s +3.2%, and several months affected by pandemic shutdowns, this equals the lowest since December 2019. This is slightly less than the 3.4% YoY inflation rate as of August.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers was unchanged, and is up 0.9% YoY, about average for the past 12 months.

• The index of aggregate payrolls for non-managerial workers rose +0.2%, and is up 4.2% YoY, and up 0.8% above the YoY inflation rate through August.

Other significant data:

• Professional and business employment declined for the first time in six months, down -9,000. These tend to be well-paying jobs. This remains above its low from last October, and remains higher YoY as well.
• The employment population ratio reversed its recent declines, rising another +0.1% to 59.2%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate rose +0.2% to 61.8% , vs. 63.4% in February 2020. IMPORTANT: both the EPOP and LFPR are greatly affected by the retiring Boomer population. In the prime age 25-54 demographic, they are virtually unchanged.

SUMMARY

This was a weakly positive report, consistent with an inflationary expansion, but with reasonably good internals. While the employment gain was weak, and taking into account the revisions to the previous two months was on net negative, and after rounding the unemployment rate rose slightly, the broader measures of employment, most especially including all of the goods producing leading sub-sectors, were positive. And while aggregate hours stalled and aggregate payrolls almost certainly declined adjusting for inflation, they remained higher on a YoY basis.  The one more significant negative was that nonsupervisory wages continue to grow at a rate less than recent inflation. 

The inflationary AI data center Boom continues, while the rest of the goods producing economy appears recessionary

 

 - by New Deal democrat

As per usual, we start out the month with the ISM manufacturing report (for September) and the construction report (for August). Since these are two of the sectors that lead the economy, they give us a good first look at the remainder of the year.

The story mainly continues to revolve around the AI data center Boom. Manufacturing is expanding, but with widespread inflation, while construction in everything except AI data centers is recessionary.

Let’s start with the ISM manufacturing report (note: any number above 50 means expansion). The headline number declined -0.1 to 54.5. For forecasting purposes, I average the last three months, which comes out to 54.9:

The more leading new orders subindex rose +1.6 to 55.3, and the three month average is 55.2:

Both the headline and new orders numbers indicate continued expansion at about the same pace as earlier this year. This means the expansion in this sector can be expected to continue at least a few more months.

There was further if more subdued positive news in the employment subindex, which rose +1.5 to to 52.7. The three month average also rose slightly further into expansion at 52.2:

Where there was very negative news was in the prices paid subindex, which rose 6.8 to 77.9, close to its highs from earlier this year as well as during the immediate post-pandemic inflation, indicating very widespread price increases upstream. The three month average was 73.4, rising closer to its post-pandemic inflationary peak:

In short, the manufacturing rebound this year continues, but there are signs that producer inflation is accelerating again.

Keep in mind that for forecasting purposes, I weigh manufacturing at 25%, and the other 75% from the ISM services report, which will be updated next week, but has been running quite positive for many months.

A decidedly different story was told by construction spending. Nominally total construction (blue in the graph below) rose 0.9% in August, but remains down -1.7% YoY. The more leading residential construction sector (red) rose 1.1% for the month, but is down -4.8% YoY. Since the price of construction materials (not shown) rose 0.3% in August and was up 10.1% YoY, the increases were more subdued:

And in YoY% terms, “real” construction spending remains negative. In the below graph I’ve also included the YoY% change in construction materials costs discussed above (gold, right scale), since the monthly changes are not seasonally adjusted:

The news was “less dismal” in manufacturing construction spending, which rose for a change, up 0.2% for the month, but remains down -19.2% YoY and about 30% from its September 2024 peak:

Both residential and manufacturing construction remain recessionary, plain and simple.

Nonresidential construction, which includes but is by no means limited to AI data center related construction, rose 0.7% for the month, and is up 0.5% YoY:

But while unfortunately I can’t show you a graph, while total nonresidential construction spending nominally increased $6,543 millions YoY, AI data center related construction spending rose $5,943 for the month alone and was higher by $35,898 million YoY. In other words, take out the AI data center Boom and nonresidential construction is declining as well.

Basically the goods-producing sector of the US economy includes the AI Boom, which is continuing, and everything else, which is somewhere between outright recessionary to slightly expanding. And the expansion is very inflationary.

Jobless claims continue to decline near historic lows

 

 - by New Deal democrat

We’ll get important information on manufacturing and construction later this morning, but in the meantime let’s take our regular weekly look at jobless claims, which continued to be *very* positive.

Initial claims for the week declined -1,000 to 197,000, and the four week moving average declined -2,500 to 200,000. With the typical one week delay, continuing claims declined -11,000 to 1.701 million:

Again, these are in the vicinity of historical lows. In particular, continuing claims are not just the lowest in 3.5 years, but they are the lowest they have been since the early 1970s with the exception of 2018-19 and 2022 through early 2023.

On the YoY% basis more important for forecasting purposes, initial claims were down -13.4%, the four week moving average down -14.5%, and continuing claims down -11.5%:

Note that the YoY comparisons are becoming even more positive than they have been in the last 15 months, a very positive sign for the economy.

Finally, before the September jobs report tomorrow, let’s take our last look at where the unemployment rate is likely headed over the next several months:

Both initial and continuing claims are back down in their late 2022 and early 2023 ranges. This suggests that not only is the unemployment rate likely to decline to 3.9% or 4.0%, but it might even decline into the 3.7% range in the next few months.

August personal income and spending: suddenly, the downturn in real pesonal incomes has vanished; everything is sunny and upbeat

 

 - by New Deal democrat

Along with the employment report, real income and spending are probably the most important monthly reports as to the health of the average American household. But at the moment, for purposes of both the nowcast and the short term forecast, it is probably *the* most important set of data of all, along with stock market prices. That’s because personal consumption, which is about 70% of the entire economy, (at least until this morning’s drastic revisions - much more on that below) appeared currently to be driven by the wealth effect from stock market gains among the uppermost incomes. Unless something else comes out of the shadows to pick up the baton, if and when this wealth effect reverses, and if and when the average consumer pulls back, are the most crucial things to watch for.

Last month I opened my summary by saying that “This year there has been a real split between the income and spending sides of that ledger,” and further indicated that while real spending continued higher and was expansionary, “Real income declined, and continues being recessionary.”

This month that was entirely obliterated by revisions that went back over a year. Suddenly, instead of being negative and recessionary, we find out that consumers have really been basking in the sunshine of record high real incomes all this time. So, for the first time ever, to show you how dramatic the revisions have been, I am re-running last month’s graphs from the personal income side. And it is so jarring that, frankly, for the first time ever, I am waiting to see if there will be leaks from the bureaucracy about political meddling (but this report will give you the numbers straight up as always with a detached eye).

Here’s the more in-depth look.

Real Income:

Nominally income rose 0.2% in August, and was up 4.3% YoY. But after adjusting for the price deflator (blue), which increased 0.3%, they actually declined -0.1% for the month but rebounded to a gain of 0.8% YoY. Further, once we take government transfers into account (red), while the monthly change on a nominal basis was only +0.1%, and a decline -0.1% in real terms, but on a YoY basis they were also up 0.8%. This is in marked contrast with last month, which gave rise to the following graph:

Now here is this month’s updated graph that includes the revisions:

As you can see, the entire weakness since early 2025 is utterly gone.

Here is what the post-pandemic YoY% graph looked like last month:

And here is the updated graph this month:

The negative YoY numbers have vanished.

Real spending:

While the income side of the ledger was suddenly revised to the sunny side of the street, the spending side remained positive also. Nominally spending rose a sharp 0.9% and was up 6.1% YoY, which means that in real terms (blue) it was up 0.6% for the month, and up 2.6% YoY. As I’ve noted many times in the past, the leading indicator in this data has to do with spending on goods (red), as real spending on services (gold) frequently increases all the way through recessions. In August real spending on goods rose 1.3%, and was 2.7% higher YoY, while real spending on services rose 0.2% for the month and is up 2.5% YoY. As you can see, the trend in all three continues to be higher this year compared with last year:

Real spending on durable goods historically tends to peak even before goods spending as a whole. As shown in the below graph, real spending on durable goods (blue) rose 1.9% in August, while real spending on nondurable goods (gold) rose 1.8%:

All of these are at record highs. No sign whatsoever of any weakness here.

Again, the trend this year vs. last year is higher. On a YoY% basis (not shown), real spending on durable goods was higher by 4.6%, and on nondurable goods higher 2.5%.

Savings, real sales, and profits:

The difference between income and spending is what is saved. Once again, the revisions to income were important. Last month, the number was an increase from 2.6% to 3.0%. After revisions, this month for August, the saving rate declined  a sharp -0.5%, but revisions meant this was a decline from 4.6% to 4.1%. While this is still very low historically, the saving rate, while low, now is higher than much of the dotcom bubble era as well as the era of the housing bubble and in 2022 (note: graph subtracts -4.1% from the rate to show the current number at the “0” line for easy comparison):

To reiterate: unless and until we see a retrenchment by consumers indicated by a higher savings rate, the party goes on. 

Finally, this morning’s report also enables the update of real manufacturing and trade sales, one of the other important coincident markers used by the NBER to date recessions. This was unaffected by the income revisions. They increased 0.6% for July, continuing their uptrend to yet another record high:

They are higher 2.3% YoY (not shown).

To sum up: this morning’s report was an utter blockbuster; but one that relied upon heavy revisions to the last year’s data. While spending is in line with earlier reports, the big hit to real personal income which I have been reporting on all this year has suddenly vanished, replaced with substantial and continuing increases. I will look into the issue of where the revisions came from further, update as necessary if and when I find out anything substantial (probably not until next week).