- by New Deal democrat
As usual, we started out the month with reports on both manufacturing and construction. I am posting separately on the two this month. So let’s start with the ISM manufacturing report, a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium (it was in deep contraction both in 2015-16 and again in 2022 without a recession occurring).
To recap briefly, any number below 50 indicates contraction. The ISM itself indicates that the number must be 42.5 or less to signal recession. For forecasting purposes, I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively.
In this morning’s report, the headline number for May declined -0.2 to 48.5, the third straight month of contraction, while the more leading new orders subindex rose +0.4 to 47.6. As per the above, both indicate continued contraction.
Here is a look at both the total index (gray) and new orders subindex (blue) for the past ten years:
Note that both remain better than they were in 2022-23.
Hare the last six months of both the headline (left column) and new orders (right) numbers:
DEC 49.2. 52.1
JAN 50.9 55.1
FEB 50.3 48.6
MAR 49.0. 45.2
APR 48.7. 47.2
MAY 48.5. 47.6
The current three month average for the total index is 48.7, and for the new orders subindex 46.7.
As I indicated above, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the average of the last two months for the headline and new orders numbers has been 51.2 and 51.4, respectively. 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. Or, more generally, if the non-manufacturing numbers on Wednesday show continued growth, the economy as a whole is not in recession now nor will be in the next several months.
In any event, as of today, the forecast signal remains a very slowly growing economy.
