- by New Deal democrat
Last month I concluded my report on the economically weighted ISM manufacturing and services indexes by writing “new orders for the entire economy are tight on the cusp of tipping into contraction.”
This month, they did, warranting a “Recession Watch.”
To recap, because manufacturing is much less important to the economy than in the decades before the Millennium, the economically weighted average of the ISM services index (75%) as well as manufacturing (25%), especially over a three month period, has been much more accurate since 2000.
On Monday the ISM manufacturing index came in at 48.5, and its three month average was 48.7. The new orders subindex came in at 47.6, and its three month average was 46.7. I wrote then that “ Thus, to signal economic contraction, this month’s numbers in the non-manufacturing report, which will be reported on Wednesday, must be 49.8 and 49.5, respectively.”
This morning the non-manufacturing index was reported at 49.9, just 0.1 above that threshold. But the new orders index was reported at 46.4, well below the tipping point.
Here the three months in the headline numbers (first line) and the three month average for services, plus the same as to the new orders services subindex (second line):
50.8, 51.6, 49.9 —> 50.8
50.4, 52.3, 46.4 —> 49.7
Below are comparisons of the headline manufacturing and services indexes:
And for the manufacturing and services new orders indexes:
While we came close last summer, at no point did either of the three month economically weighted averages tip into contraction. In May the three month economically weighted average of the headline indexes was 50.3. But the three month economically weighted average of the more leading new orders subindexes was 49.0. This raises a red flag.
In short, new orders for the economy as a whole contracted in May. This is enough to warrant a “recession watch.” Should the headline numbers follow, that would warrant a “recession warning.”
As I’ve said in the past, treat the terms “watch” and “warning” the way you would for weather. A “watch” means that conditions are right, and the economy is at significantly heightened risk of a recession starting in the next few months. A “warning” would mean that a recession is likely, and almost imminently.
In the meantime, watch to see if the remaining short leading indicators to fall into place, most notably new jobless claims, consumer retail spending, employment in the goods-producing sectors, at very least a stalling in aggregate real payroll growth, and a new decline in the stock market.
