- by New Deal democrat
The ISM manufacturing and services reports assume heightened importance this month in view of the continuing federal government shutdown. These two, along with the regional Feds’ manufacturing and services reports, are our best sketch of the economy until the more thorough federal reports resume (hopefully?)
We already have the regional Feds’ reports, which as I concluded last week, showed a little rebound in manufacturing activity, but contraction in services. Prices paid increased at the most widespread clip since the major inflation of 2021-22. Prices received also increased, but not as much, meaning that only part (1/2 is a reasonable guess) of increased prices were passed on to consumers, which is a problem in and of itself. Finally, employment was essentially flat, neither growing nor contracting meaningfully.
With that in mind, let’s turn to today’s ISM manufacturing report. 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. That briefly justified a “recession watch” during the summer, before the strong August rebound mainly in the services sector.
Today’s report continued this year’s string of contractionary readings, declining slightly to 48.7. The more significant news is that the more leading new orders subindex, which had rebounded to 51.4 in August, and then sank back into contraction at 48.9, gained slightly to 49.4. Here is a look at both the total index (blue) and new orders subindex (gray) for the past three years (via Tradingeconomics.com):
Note that both remain slightly better than their low points in 2022-23, which is noteworthy because there was no recession then.
Hare the last six months of both the headline (left column) and new orders (right) numbers:
MAY 48.5. 47.6
JUN. 49.0. 46.4
JUL 48.0. 47.1
AUG 48.7. 51.4
SEP. 49.1. 48.9
OCT 48.7. 49.4
The current three month average for the total index is 48.8, while new orders improved to 49.9. As has been the case for awhile, this is in accord with the recent regional Fed reports, which as indicated above have shown some mild improvement in the manufacturing production picture.
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 52.5 and 53.2, respectively. Pending the ISM report on services on Wednesday, the economically weighted headline number is 51.1, and the new orders average is 52.2. These are weakly expansionary.
Normally in the past I have not reported on prices paid or employment in these ISM indexes, but these are more important now.
Prices paid (the ISM does not report on prices received downstream) decelerated from 61.9 last month to 58.0 this month, suggesting as with the regional Fed indexes that there is still widespread pricing pressure, but it is getting integrated into companies’ models. Here are both manufacturing (blue) and services (gray) prices from the ISM:
But the low point, as it has been all year in this index, is employment, which did improve, but from 45.3 to 46.0. Here is employment from both the manufacturing (blue) and services (gray) indexes:
In short, the ISM manufacturing report for October largely confirms what we saw with the averages of the regional Fed manufacturing reports: diffuse price increases, improving new orders, very slight improvement in production, and flat to moderately diffuse contracting employment.
The ISM services report was particularly strong in August. That won’t go out of the three month average for another month. But if the services report on Wednesday is contractionary, that would warrant at least a yellow flag caution that a recession may be close. Unfortunately all we have with this data, relatively speaking, is shadows on the wall, so I am reluctant to draw any stronger conclusion.
