- by New Deal democrat
As Although it ended almost three months ago, there are still many economic series that have not caught up, including construction spending, which would normally have been reported this morning for December. As of now, it is only updated through October, and November and December are not expected to be reported for several more weeks. Which continues to mean that the ISM manufacturing and services reports, as well as the regional Fed manufacturing and services reports, are our most complete contemporary picture of the economy.
Last month I wrote that the “ISM manufacturing report for December confirms what the regional Fed reports were telling us: the forward-looking situation is improving,” and boy-howdy did that ever continue in January!
In more detail, the headline number rose 4.7 from 47.9 to 52.6 (recall that 50 is the dividing line between expansion and contraction). This is the highest reading since August 2022. The three month average, which I use for forecasting purposes, rose to 49.5, still slightly contractionary, but the highest average since one year ago:
The more forward looking new orders component exploded from 47.4 to 57.1, the highest reading sinc February 2022. The three month average is 50.6, expansionary for the first time since the end of 2024:
On the other employment continued to contract, although it too rose from 44.8 to the “less bad” 48.1. The three month average is 45.7, still contractionary, and equivalent to several readings last spring:
This suggests a further decline in goods-producing jobs when we get the January employment report at the end of this week.
The other big concern has been prices, particularly in view of the tariff situation. The diffusion index for these rose slightly from 58.5 to 59.0, lower than the readings approaching 70 last spring, but higher than all but one reading in 2023 and 2024. Their three month average is 58.7:
This suggests that inflationary pressures remain very present.
As I have noted in all of these monthly reports for the past year, 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 averages of the last two months for the headline and new orders numbers have been 55.2 and 55.5, respectively.
If the services index, which will be reported on Wednesday, is in line with those numbers, it will suggest, as did the regional Fed manufacturing indexes for January, that this important sector is improving, and that the economy remains in an expansion, which may be improving as well. The caveat remains the important stagflationary pressures which have been showing up in almost all the recent data.
