March ISM reports show stagflationary expansion — light on the “stag-,” heavy on the “-flation”

 

 - by New Deal democrat

 

As I’ve previously noted a number of times, one of the more surprising developments in the past few months has been the resilience of manufacturing. After taking a beating following “Liberation Day” one year ago, companies adapted and resumed production if anything at an even more brisk pace.

That was apparent as recently as the preliminary data on new factory orders released this morning for February. While overall new orders for durable goods declined -1.4% for the month (blue, right scale), core capital goods orders rose 0.6% to a new post-pandemic record (red, left scale):

On a YoY basis, headline new orders were up 7.3%, while capital goods orders were up 5.1%, continuing the last six months’ trend of the best YoY growth since the beginning of 2023:

A similar, and more complex, story was told by the ISM manufacturing and services indexes for March. The headline number for services declined to 53.9, still a good showing (recall that any number above 50 indicates expansion), and for manufacturing came in at 52.7, the best number since the summer of 2022 (in the graphs below, the services number is in blue, the manufacturing number in gray):

And the more leading new orders subindexes showed even more strength, with services coming in at a very strong 60.6, the highest reading in three years, while manufacturing new orders declined to a still expansionary 53.5:

For forecasting purposes, I use the three month average of the series, with a 25% weighting to manufacturing and 75% to services. The weighted average of both the headline and new orders components are the strongest in three years.

If the present and leading conditions are without doubt positive, what about the stagflationary scenario?

Well, the prices paid components both came in sharply strong, with services at 78.2, and manufacturing even slightly higher at 78.3, both the highest since June 2022:

If both the goods producing and services providing sectors of the economy were being clobbered by inflation in March, the picture for employment was considerably weaker. While the “less bad” trend in manufacturing employment continued, with a slightly contractionary 48.7, still its second best reading in the past 12 months after January’s, the employment subindex in services declined sharply to 45.2, its worst reading since the pandemic except for December 2023:

This is somewhat foreboding for the official employment metrics for the next several months. According to Jill Coronado of the University of Texas at Austin, “the ISM non-manufacturing employment index, particularly the three month average has some significant predictive power.” Here is her accompanying graph:

The three month average of 49.1 isn’t as low as it was last summer, but nevertheless predicts slight contraction, particularly of services providing employment.

To summarize, on the bright side, left to their own devices the manufacturing and services data indicate not just continued expansion, but even more robust expansion. But it is a stagflationary expansion, with simultaneously moribund employment and widespread price increases.

And of course, neither have been left to their own devices. Even the March data only marginally reflects the impacts of the Iran war. Those are likely to show up much more drastically in the April and May reports. To put it another way, “Buckle your seatbelt, Dorothy, ‘cause Kansas is going bye-bye.”

The “real,” wage adjusted price of gas isn’t at privation levels yet

 

 - by New Deal democrat

Back in the “before” days, as in January, before the Iran war, I wrote about how low gas prices were actually a tailwind for the economy. Because since the start of the Millennium over 25 years ago, they had only been so low compared with average hourly wages on only 3 occasions: after the 2001 recession, late in the Great Recession, and during the COVID lockdowns. Put another way, it only took about 7 minutes of work to buy a gallon of gas. This leaves a lot left over for other consumption - just as it did at the end of the two non-COVID recessions.

Needless to say, that has changed. But by how much, really? On the one hand, as I’ve pointed out previously, on a percentage basis this is the biggest one-month spike in gas prices since the 1970s. We’ll find out just how badly that effected the CPI for March this coming Friday.

But how much of the “tailwind” has been taken away? That’s what the updated graph below, of the “real” cost of gas compared with average hourly nonsupervisory wages, shows:

The “size” of the spike is about equal to the 2005 Katrina spike, and less that the 2022 Ukraine invasion spike. But in relative terms, it has not come anywhere close to the 2008 spike that helped exacerbate the Great Recession, nor the Ukraine invasion spike. Nor, for that matter, what I used to call the “Oil Choke Collar” of the early 2010’s, when gas prices put a lid on the velocity of any expansion in the early years of the last recovery. In order to approach the level of those shocks, we would need to see gas prices of $5/gallon, at minimum.

The gas price information doesn’t go all the way back to the 1970’s, but the price of oil, specifically West Texas Crude, does. So here is the same graph, of oil prices relative to average hourly nonsupervisory wages, going all the way back to before the first oil shock:

Here you can see that just before the start of the Iran war, the “real” price of oil was equivalent to the levels it was at from 1986-99, when gas prices were not a consumer issue at all. The current spike has not taken us back up to the levels of either the first Gulf War spike of 1990 nor the second oil shock of 1979-80.

The bottom line here is that, although this price spike is enough to marginally change consumer behavior, it isn’t yet at the point where in the past it has created a sense of real privation (in 1974 the spike was accompanied by an embargo that resulted in gas rationing). That isn’t to say it couldn’t get there in another month or two. Although I won’t bother with a graph, according to GasBuddy the national average has risen as much as another $0.12 in April up to $4.11. To reiterate, my sense is that a real sense of privation isn’t likely to kick in unless gas prices reach $5/gallon.