- by New Deal democrat
As usual, the new month begins with important manufacturing and construction reports which give us the pulse of the goods-producing economy.
The ISM manufacturing report has been a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium and China’s accession to regular trading status. While any number below 50 indicates contraction, the ISM itself indicates that the number must be under 42.8 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. For the last three months, months ago, that average justified a “recession watch.”
Today’s report was an improvement, although the headline number continued in contraction at 48.7. Significantly, the more leading new orders subindex rose from 47.1 in July to 51.4 in August. 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:
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
AUG 48.7. 51.4
The current three month average for the total index is 48.6, and for the new orders subindex 48.3. Note that the regional Fed reports, which turned positive during the last month, accurately telegraphed the improvement in the new orders subindex into expansion. But at the same time, although the three month averages improved, they both remain in slight contraction.
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 50.5 and 50.8, respectively. Pending the ISM report on services Thursday, the economically weighted headline number is exactly 50.0, and the new orders average is 50.2.
If the ISM services report on Thursday does not indicate any further downturn, this means that the economy as a whole is every so slightly expanding, and would justify lifting the “recession watch” posted last month.
But if the news from new orders in particular in the manufacturing index was a relief, construction in July, the month covered by this morning’s report, continued to be more of the same, i.e., a continuing decline since a summer of 2024 once we adjust for the cost of construction materials.
For the month, total construction spending (blue in the graph below) declined -0.1%, while residential construction spending (red) increased 0.1%. Nominally, total residential construction spending has declined every month but one since last August, and is now down -3.4% from its August 2024 peak. Residential construction spending has declined every month but two (including this month) in the past year, and is down —6.8% since May of last year:
Adjusted by the cost of construction materials, both measures declined again last month. So adjusted from their peaks last year, total construction is down -7.1%, while residential construction is down -9.4%. If there is a silver lining, it is that adjusted residential construction spending may have stabilized in the past three months:
For the last three months I have concluded that these two reports together suggested that the goods-producing part of the economy as a whole has been contracting, if only slightly. That still appears to be the case.
