- by New Deal democrat
The economically weighted ISM manufacturing + services indexes continue to be the best timely snapshot of the US economy. On Tuesday the manufacturing sector was updated; this morning services were. The weighting, based on their impact on the economy, is 25% manufacturing and 75% services. Further, to cut down on monthly noise, I particularly look at the three month averages.
The summary version is that both the headline and the more leading new orders components continue very positive, but the prices paid component indicates that if anything inflationary pressures are increasing, while employment is showing outright contraction.
To the numbers: the headline services index rose 0.8 to 55.4 [recall that any number over 50 indicates expansion]. The three month average was 55.2. Since the three month average for manufacturing was 54.5, the economically weighted average was 55.0 [note: in all of the graphs below, the manufacturing number is blue, and services gray]:
New orders rose 3.7 to a very strong 60.9, its most positive reading in over three years. The three month average was 557. The three month average for manufacturing was 55.5, so the economically weighted of this most forward looking component was 57.2:
So far, so good. But employment in the services index was contractionary for the second month in a row, rising 0.4 to 47.8. The three month average was 48.8. Since the manufacturing employment subindex averaged a slightly positive 51.2, the economically weighted average was below 50 for the second month in a row as well, increasing 0.2 to 49.4:
Importantly, although it has been better than summer of last year, the ISM weighted average has only shown expansion in two month this year: February and June. The authoritative QCEW metric, which suggested that nonfarm payrolls overcounted employment in the first three months of this year, thus also suggests that we may see more weakness in both the monthly and benchmark revisions of that metric. And we’ll see how August compares tomorrow.
Finally, widespread price increases continue to be a problem, with the prices paid index for services rising 2.3 to 72.6, with the three month average at 70.2. The three month average for manufacturing did ease a little this month at 71.7, but the economically weighted average increased 1.2 to 72.4:
This isn’t quite as bad as during the post-pandemic inflation, but not by much. Indeed, This is the worst reading since mid-year 2022 (note that unlike the other three graphs, this one shows the last five years for better comparison).
To recapitulate, the economically weighted ISM averages indicate that as of August, the economy remained in reasonably strong expansion, and new orders suggest it might get even stronger. But inflationary pressures are getting even stronger, and employment is not increasing at all. In other words, as I’ve written before, a stagflationary expansion.