ISM non-manufacturing shows that services continue to power the economy forward. Are they inflationary?

 

 - by New Deal democrat

Because services are roughly 3/4’s of the economy, I now pay a lot of attention to the economically weighted average of the ISM manufacturing and services indexes. Since the accession of China to normal trading status with the US, a downturn in manufacturing alone has simply not been enough to forecast recession - which has again been true in the past two years.

This morning the ISM non-manufacturing (i.e., services) index again came in positive, at 52.1, while the more leading new orders subindex came in at 53.7. Their three month weighted averages are 54.3 and 56.8, respectively.

Since the three month average for the manufacturing index is 47.4, and for the new orders component 47.9, that means the economically weighted three month averages are 52.6 for the total indexes, and 54.6 for the new orders components.

This means that the economy is nowhere near a recession for the next few months, as services continue to power it forward.

An interesting question is whether the strength in services, which as you can see above includes continued strong pricing pressure, translates into continued elevation in the non-shelter services portion of the CPI and PCE indexes. I haven’t done a comparison, but it very much looks like a significant correlation to calculate going forward.

JOLTS report for October: continuing trend of deceleration has begun to pose a problem

 

 - by New Deal democrat

The JOLTS survey parses the jobs market on a monthly basis more thoroughly than the headline employment numbers in the jobs report. It also is a slight leading indicators for both initial jobless claims and unemployment; and for forecasting wage growth as well. 

Like many other statistics concerning jobs, the JOLTS series have been deceleration for several years. The question now is whether they level off or continue to decelerate towards outright declines in net job creation. 

In October, the data was mixed. The soft statistic of job openings as well as the hard data of quits and also layoffs and discharges were positive, while actual hires declined. The below graph norms the series above (expect for quits) to 100 as of just before the pandemic:

Both actual hires, as well as quits, turned weaker than their pre-pandemic levels a little more or less than one year ago respectively. Openings remain higher but continue their decelerating trend as well.

Showing the same data as YoY% changes tells us that there has been no significant change in the decelerating trend:

In other words, there is no evidence that these metrics have begun to level off.

To show the longer historical trend, I have normed each of these series by the prime age population level, and also normed to zero as of their current readings, below:

None of these are actually negative, but hires in particular are mediocre compared to their performance since the turn of the Millennium, while quits remain at pretty robust rates. Job openings have softened but are confounded by their long term inflating trend that mainly shows changes in how businesses handle purported vacancies.

The best news in October was that after rising sharply due to hurricanes in September, layoffs and discharges retreated back into their range for the previous year. This is of a piece with the decline in initial jobless claims during November back to their previous range as well:

This may translate into a decline in the unemployment rate in Friday’s report for November as well.

Finally, the quits rate (blue in the graph below) has a record of being a leading indicator for YoY wage gains (red):

The quits rate stabilized earlier this year, before resuming its decline from June through September. This month, as you can see, the rate jumped again, but is likely just noise:

Despite the positive news on the quits rate this month, the likelihood is that on a YoY basis wage gains will continue to decelerate as well. If inflation stabilizes or picks up again, this could create a problem next year. The same could be said for the overall picture of the JOLTS data: no problem now, but if the trend continues, possibly a big problem by later next year.

ISM manufacturing remains weak, while construction spending continues to power along

 

 - by New Deal democrat

As usual, the month’s data begins with the ISM manufacturing index, and with a one month delay, construction spending.

Because manufacturing is of diminishing importance to the economy, and was in deep contraction both in 2015-16 and again in 2022 without any recession occurring, I now use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes. As a refresher, any number below 50 means contraction.

In November both the total index and the more leading new orders subindex improved. The former rose 1.9 to 48.4, while the latter rose 3.3 into expansion at 50.4.

Including November, here are the last six months of both the headline (left column) and new orders (right) numbers:

JUN 48.5. 49.3

JUL. 46.8. 47.4

AUG 47.2. 44.6

SEP 47.2. 46.1

OCT 46.5. 47.1

NOV  48.4. 50.4

Here is what they look like graphically:

The three month average for the manufacturing index is 47.4, and for the new orders component 47.9. For the past two months, the average for the non-manufacturing headline has been 55.5 and the new orders component has been 58.4. These are very strong positive numbers. For the weighted ISM infexes to signal recession, the services component would have to swan dive to about 40 in both readings. Since that isn’t going to happen, we can safely conclude that the ISM indexes forecast continued expansion for the next few months.

Construction spending for October also came in generally positive. On a nominal basis, total construction spending rose 0.4% to a new record, and residential spending rose 1.5%, down -0.8% since May 2024. Only manufacturing construction bucked the trend, declining -0.1%, and is now down -0.9% from its June 2024 peak.  Since the onset of the pandemic, total nominal construction spending is up 45.1%, residential up 53.7%, and manufacturing up 200.6% - this last due to incentivized re-shoring spending under the Inflation Reduction Act:

Since housing is such an important leading component of the economy, here is residential construction spending as above compared with the PPI for construction materials:

The prices of construction materials have been generally slowly declining for the past two years, meaning that real inflation-adjusted residential construction spending has risen to its highest level since January 2021, including a 0.4% increase in today’s reading:

The bottom line is that, while manufacturing remains weak, the economy continues to be powered along by (somewhat surprising) continued strength in construction, as well as the services sector.

Weekly Indicators for November 26 - 30 at Seeking Alpha

 

 - by New Deal democrat

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

Thanksgiving came in the 4th week of November this year vs. the third week last year, which means seasonality played havoc with a lot of the YoY weekly comparisons this past week (and will do in this coming week as well.

But the overall story remains the same: generally positive short term and coincident conditions, with very mixed long term background measurements.

As usual, clicking over and reading will bring you up to the virtual moment as to the economic data, and reward me a little bit for sorting it all out for you.

Real personal income and spending for October were all good; no special cause for concern yet about inflation

 

 - by New Deal democrat

Let me finish catching up this week with a quick look at personal income and spending, which were reported on Wednesday.

The “big” takeaway I’ve seen elsewhere is that inflation picked up, and maybe will complicate the Fed’s task. But I don’t see where it’s such a big deal. The price index increased 0.2% for the month, mainly on the back of a 0.4% increase for services, while the price index for goods declined -0.1%:

As you can see, while that’s an acceleration from a few months ago, it’s hardly out of line for the past two years. And the YoY% increase to 2.3% was tied with August’s rate for the lowest since the pandemic (blue in the graph below):

As you can see, goods inflation as measured by the index is still somnolent; it is inflation for the services component which remains somewhat “hot” compared with before the pandemic.

The bottom line is, this was only a one month increase. If the trend continues to increase for another month or two, I’ll be more concerned, but for now this could easily just be noise.

Otherwise, the news remained all good. Both real personal income and real personal spending increased for the month, by 0.4% and 0.1% respectively, to new highs:

The personal savings rate also increased slightly to 4.1%, also a positive thing:

The important coincident indicator of real personal income less government transfers also increased:

As did real manufacturing and trade sales for September:

So the bottom line is that all of the important metrics were positive, and I don’t see any cause for concern yet about any sustained pick-up in inflation.