ISM manufacturing for January breaks out to the expansionary upside, with a sidecar of stagflation

 

 - 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:

 https://tradingeconomics.com/united-states/business-confidence 

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:

 https://tradingeconomics.com/united-states/ism-manufacturing-new-orders 

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:

 https://tradingeconomics.com/united-states/ism-manufacturing-employment 

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:

 https://tradingeconomics.com/united-states/ism-manufacturing-prices 

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.

Weekly Indicators for January 26 - 30 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

The trends in the high frequency data that became apparent after last summer have continued, and if anything are intensifying. In particular, a real surge in commodity prices and somewhat in a mirror image, the US$ decline which is beginning to verge on disorderly. Meanwhile, consumer spending (probably by the top 10% who have been watching their stock portfolios increase sharply in value) continues to hold up well. 

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and put a penny or two in my pocket for my efforts organizing the data for you.

Economically weighted regional Fed indexes for January suggest continued stagflationary pressures [Update: PPI as well]

 

 - by New Deal democrat

To briefly reiterate, although the government shutdown ended over two months ago, much of the official monthly data - including on sales and spending - is stale, dating to November and even earlier. So the most current measures of these are the ISM manufacturing and non-manufacturing reports, due next week, and the regional Fed banks’ manufacturing and services indexes. While certainly not perfect, in the aggregate they at least sketch on outline of where the economy has been going in the past month. 

On Wednesday I looked at the goods producing sector. Today let’s look at the Services sector, which comprises about 75% of the whole economy; and then the economically weighted average of manufacturing and services together.

Below are the January values for important components of the five regional Fed services indexes. The month over month changes are in parentheses, showing momentum (the 2nd derivative), followed by the absolute diffusion values. The final number is the average change and absolute number for all 5 together. The chart includes, in order, NY, Philadelphia, Richmond, Kansas City, and Texas:

Regional Fed:     NY.           PHL.           RVA.       KC.      TX.       Avg

Headline:  (+3.9) -16.1; (+12.6) -4.2; (+5) -6; (-1) 2; (+5.0) 2.7; (+5.1) -4.3     

Cap Ex   (+0.8) -6.1; (-5.5) 5.1; (+4) -5; (+9) 18; (-16.8) 6.8; (-8.5) 3.8

Prices Paid  (-8.2) 63.9; (-5.8) 34.5; (-1.8) 4.3; (+5) 39; (-5.1) 26.2; (-3.2) 32.6

Prices Rec’d (-2.9) 27.6; (-5.8) 13.2; (+0.2) 3.4; (+11) 21; ( 0 ) 7.9; (+0.5) 14.6  

Wages (+6.3) 30.0; (-8.9) 37.2; (+3) 20; (+11) 24; (+2.5) 13.5; (+2.8) 24.9 

Employment (+1.9) -5.5; (+0.1) 9.7; ( 0 ) 5; (+3) -3; (+1.7) 0.9; (+) 1.3

With one exception, the trends in December continued in January. Headline business conditions continued to indicate contraction, but at a decelerating rate. If the trend of the last few months continues, this will turn positive in February or March. Meanwhile both prices paid and prices received continued to show broad increases, the former more than the latter. Wages also continued to show broad growth, although they may be growing too fast for the underlying business conditions. This suggests sustained services inflation will continue, and even perhaps amplify in the months ahead. 

By contrast, employment continued to be generally flat. The only big change was in CapEx spending, which had been growing strongly, weakening sharply, although still positive. 

On Wednesday I reported that the headline for the manufacturing index was +2.8. New Orders were +5.4. Prices paid were +35.6, and prices received were +16.9. Wage growth was +16, and Employment was a meager +1. Economically weighting the two indexes at 25% for manufacturing and 75% for services gives us the following overview of the entire economy:

Headline: 2.5

CapEx/New Orders: 4.2

Prices paid: 33.4

Prices received: 15.2

Wages: 22.7

Employment: 1.3

The economically weighted average of all the components is positive, indicating increases or expansion. The two price components and wages all indicate continuing strong inflationary pressure, likely due in part to tariffs, US$ weakness, and/or a move to safety in precious metals. Only some of which - but a significant amount - is being passed on to consumers. In contrast the business conditions and new orders/CapEx subindexes suggest very tepid expansion. 

Or, in short, more stagflation.

We’ll see if the ISM indexes confirm or diverge from the regional Fed averages next week.

UPDATE: This morning’s PPI report for December, showing a monthly increase of 0.5% for final demand prices (black), similarly suggests stagflation - although in fairness commodity prices (red) declined -0.3%. On a YoY basis, as indicated in the graph linked to below, both of these as well as CPI are converging on the 3% YoY marker:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1R2py&height=490 

Jobless claims: the positive regime change continues, suggesting a lower unemployment rate ahead

 

 - by New Deal democrat

Let’s take our normal weekly look at jobless claims. As a general reminder, these are a good high frequency short leading indicator for the economy as a whole, and also somewhat noisily for the monthly unemployment rate.

In the past several months, I have highlighted what appears to be a “regime change” in claims that dates back to the middle of last year, as most weeks since then have seen claims lower than they had been a year previously.

That continued this week, as new claims declined -1,000 from an upwardly revised (by 10,000!) 210,000 last week to 209,000. The four week moving average increased 2,750 to 206,000. Continuing claims, with the typical one week lag, declined sharply, down -38,000 to 1.827 million, the lowest reading since September of 2024:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1R0cN&height=490 

The lower YoY% comparisons continued, with initial claims down -0.5%, the four week average down -3.4%, and continuing claims down -1.2%:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1R0de&height=490 

These are all positive readings for the economy. It is hard to see a downturn with so few people being laid off. Again, I caution that (1) there may be some unresolved post-pandemic seasonality in these numbers, in which case they will begin increasing in the next several weeks; and (2) they may also be impacted by immigrant labor abandoning their jobs (or worse).

Finally, the significant downturn in initial and continuing claims since early November strongly suggests that the unemployment rate, which peaked at 4.5% in November, is likely to continue to decline towards the range of 4.2% or even 4.1% in the next several months:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1R0dY&height=490 

We’ll find out the first draft of that answer next week.

Finally, an administrative note. As you all are aware, my ability to post graphs to this blog was nuked by Apple’s IOS update in December (and by all accounts, the further update this month is far more buggy). After attempting to fix this on my own, I have contacted the local Apple expert to see if they can fix it — which stinks, because I write this blog pro bono, and the fix will cost me $$. Apparently, my problem is a combination of Apple’s recent crapification combined with retaliatory crapification by Google, such that Google images refuses to recognize the “handshake” from the Apple update.

The bottom line is that one of two things is likely to happen in the next week. Either the problem will be fixed, and I will be able to post images again, or I am going to need to launch a “lifeboat” site separate from this blog for new posts. In the meantime, my readership appears to have been unaffected, so thanks to all of you for sticking with me through this time.

Regional Fed manufacturing indexes suggest rebound continued in January, with continued inflationary (tariff-related?) pressures

 

 - by New Deal democrat

Although the last federal government shutdown has been over for 2.5 months — and a new one might begin this weekend — with the exception of a few headline indicators like inflation, industrial production, and employment, most of the data is still lagging by at least one month, i.e., it has only been released through November. And some is still two or more months behind.  

That means that the many of the most current measures for sales and orders are lagging by at least one month, i.e., the most recent update was for November. And many of the others, especially having to do with sales, rents, and orders, are still lagging by two months or more. 

Which means that the most current measures of economic activity in many areas continue to be the ISM manufacturing and non-manufacturing reports, due next week; and the regional Fed banks’ manufacturing and services indexes. While certainly not perfect, in the aggregate they at least sketch on outline of where the economy has been going in the past month. 

Today let me update the regional manufacturing indexes for January. While this is only about 1/4 of all economic activity, it is the  most volatile, and generally the most leading sector.

The below chart includes, in order, NY, Philadelphia, Richmond, Kansas City, and Texas. Month over month changes are in parentheses, with the absolute values for January following. The final number is the average change and absolute number for all 5 together.

Regional Fed:     NY.           PHL.           RVA.       KC.    TX.    Avg

Headline:     (+11.4) 7.7; (+22.8) 12.6; (+1) -6; (-1) 0; (+10.1) -1.2; (+8.0) 2.8          

New Orders (+7.6) 6.6; (+9.4) 1.; (+2) -6; (0) 0; (+15.4) 11.8; (+3.5) 5.4 

Prices Paid  (-1.4) 42.8; (+3.3) 46.9 (-0.5) 7.1; (+4) 44; (+1.9 ) 37.1; (+4.1) 35.6 

Prices Rec’d (-11.0) 14.4; (+3.5) 27.8; (-0.4) 4.6; (-3) 19; (+9.7) 18.5; (+1.4) 16.9

Wages* (n/a) n/a; (n/a) n/a; (-10) 14; (n/a) n/a; (-4.3) 17.4); (-7.2) 16.0

Employment  (-16.5) -8.0; (-3.2) 9.7; (-5) -6; (+4) 0; (-0.2) 8.2; (-1.8) 0.6

____

* only 2 of the banks report this information

To summarize, the January regional Fed reports suggest that headline activity and new orders continue to improve, and at an improving pace (after a pause in December). Inflation in commoditiy prices remains widespread and even increasing (which may also reflect the weakening US), and while the prices they have received also continue to increase significantly, they are not recouping anything like their production costs. Meanwhile employment continues to be just barely positive, but wage growth continues, although at a more subdued pace.

This is of a piece with the most recent data on manufacturers new orders through November, on which I reported on Monday, and the December industrial production report from several weeks ago, both of which indicated improvement in orders and production in the manufacturing sector. It is of interest that the regional growth appears to be concentrated in Texas. Aside from that region, growth (including prices) is must more muted. As per my speculation on Monday, I suspect this has much to do with the building of AI-related data centers.