- by New Deal democrat
As per usual, we start out the month with the ISM manufacturing report (for September) and the construction report (for August). Since these are two of the sectors that lead the economy, they give us a good first look at the remainder of the year.
The story mainly continues to revolve around the AI data center Boom. Manufacturing is expanding, but with widespread inflation, while construction in everything except AI data centers is recessionary.
Let’s start with the ISM manufacturing report (note: any number above 50 means expansion). The headline number declined -0.1 to 54.5. For forecasting purposes, I average the last three months, which comes out to 54.9:
The more leading new orders subindex rose +1.6 to 55.3, and the three month average is 55.2:
Both the headline and new orders numbers indicate continued expansion at about the same pace as earlier this year. This means the expansion in this sector can be expected to continue at least a few more months.
There was further if more subdued positive news in the employment subindex, which rose +1.5 to to 52.7. The three month average also rose slightly further into expansion at 52.2:
Where there was very negative news was in the prices paid subindex, which rose 6.8 to 77.9, close to its highs from earlier this year as well as during the immediate post-pandemic inflation, indicating very widespread price increases upstream. The three month average was 73.4, rising closer to its post-pandemic inflationary peak:
In short, the manufacturing rebound this year continues, but there are signs that producer inflation is accelerating again.
Keep in mind that for forecasting purposes, I weigh manufacturing at 25%, and the other 75% from the ISM services report, which will be updated next week, but has been running quite positive for many months.
A decidedly different story was told by construction spending. Nominally total construction (blue in the graph below) rose 0.9% in August, but remains down -1.7% YoY. The more leading residential construction sector (red) rose 1.1% for the month, but is down -4.8% YoY. Since the price of construction materials (not shown) rose 0.3% in August and was up 10.1% YoY, the increases were more subdued:
And in YoY% terms, “real” construction spending remains negative. In the below graph I’ve also included the YoY% change in construction materials costs discussed above (gold, right scale), since the monthly changes are not seasonally adjusted:
The news was “less dismal” in manufacturing construction spending, which rose for a change, up 0.2% for the month, but remains down -19.2% YoY and about 30% from its September 2024 peak:
Both residential and manufacturing construction remain recessionary, plain and simple.
Nonresidential construction, which includes but is by no means limited to AI data center related construction, rose 0.7% for the month, and is up 0.5% YoY:
But while unfortunately I can’t show you a graph, while total nonresidential construction spending nominally increased $6,543 millions YoY, AI data center related construction spending rose $5,943 for the month alone and was higher by $35,898 million YoY. In other words, take out the AI data center Boom and nonresidential construction is declining as well.
Basically the goods-producing sector of the US economy includes the AI Boom, which is continuing, and everything else, which is somewhere between outright recessionary to slightly expanding. And the expansion is very inflationary.
