- by New Deal democrat
Since Friday featured the very salient jobs report - and its immediate fallout - I delayed reporting on two other important reports that typically start the month - the ISM manufacturing index, and construction spending - until today. As it turns out, they only amplify the message from the employment report that starting in April - remember “Liberation Day”? - the goods producing part of the economy turned down.
Let me start with the ISM manufacturing report, and repeat my typical opening summary. This metric has been 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). Any number below 50 indicates contraction. The ISM itself indicates that the number must be 42.5 or less to signal recession.
Because of the report’s diminished importance, 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. Two months ago, and again last month, that average justified a “recession watch.”
Friday’s report continues the trend. The headline number for July declined -1.0 to 48.0, while the more leading new orders subindex rose 0.7 to 47.1. Here is a look at both the total index (blue) and new orders subindex (god) for the past fifteen years (via Briefing.com):
Note that both remain slightly better than their low points in 2022-23.
Hare the last six months of both the headline (left column) and new orders (right) numbers:
FEB 50.3 48.6
MAR 49.0. 45.2
APR 48.7. 47.2
MAY 48.5. 47.6
JUN. 49.0. 46.4
JUL 48.0. 47.1
The current three month average for the total index is 48.5, and for the new orders subindex 47.0.
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 50.4 and 48.8, respectively. Pending the ISM report on services tomorrow, the economically weighted headline number is 49.8, and the new orders average is 48.4.
In short, as of now for the third month in a row the new orders average is forecasting economic contraction in the next few months, and has now been joined by the headline index as well. Which means that, as of today, the “recession watch” forecast signal continues
If anything, that “recession watch” is only amplified further by Friday’s report on June construction spending.
For the month, total construction spending (blue in the graph below) declined -0.4%, while residential construction spending (red) declined -0.7%. Nominally, total residential construction spending has declined every month but one since last August, and is now down -3.6% from its May 2024 peak. Residential construction spending has declined every month but one in the past year, and is down -7.1% since May of last year:
Even though the cost of construction materials (gold) declined -1.6% in June, meaning that in “real” terms both measures rose last month, that has been the only decrease in costs this year, meaning their respective “real” declines from peak are -7.1% and -9.6%:
Two months ago I concluded by writing “Putting this report together with this morning’s other report on manufacturing from ISM, it appears the goods-producing part of the economy as a whole is very slightly contracting. It will be interesting to see if this is reflected in a decline in goods-producing jobs in Friday’s report.” Last month I reiterated that the goods-producing sector of the US economy was in a downturn.
The revisions in Friday’s jobs report only (here’s that phrase again) amplified that further, as goods-producing jobs have declined for three months in a row:
Which makes tomorrow’s ISM services report decisive, if it means the economically weighted average remains in contraction. In that regard, here’s the graph of the past three years of that index:
And here is the same time period for real consumer spending on services:
The two graphs broadly correlate, and since last Thursday’s real increase in services spending was one of the lowest during that period, I am not optimistic.
Bottom line: the “recession watch” continues.
