The economically weighted ISM indexes for July show a reasonably strong but stagflationary expansion

 

 - by New Deal democrat

The economically weighted ISM manufacturing + services indexes continue to be the best timely snapshot of the US economy. With this morning’s update of the services index through July, let’s see what they say. As a quick refresher, I particularly look at the three month average to smooth out noise, and weigh manufacturing at 25% and services at 75%. 

The headline services index, as well as its more leading new orders component, have been consistently positive with the exception of several months last summer. That continued in July. [Note: in all graphs below, the manufacturing component is in blue, with services in gray.]

The headline services index came in at 54.1 [recall that any reading over 50 means expansion]. The three month average was 54.2. Since the three month average for manufacturing was 54.3, the economically weighted average was also 54.2:

New orders came in at 57.2, among its strongest readings of the past three years. The three month average was 56.5, which as it happens was the exact same average for manufacturing, meaning - naturally! - that the economically weighted average was also 56.5:

But if the headline and leading new orders components were very positive, the same could not be said of employment, which in the services index slid back into contractionary territory at 47.4. The three month average was 48.8. The manufacturing employment subindex averaged a very slightly positive 50.4, meaning the economically weighted average was 49.2:

The monthly average of the two employment subindexes has diverged from the official jobs report this year, which has been positive for 5 of 6 months, and showing a gain of over 100,000 jobs in 4 of them. By contrast, the ISM weighted average has only shown expansion in two of them: February and June. Possibly the two metrics will be more aligned once the gold standard for employment QCEW is released for Q1 at the end of this month.

Finally, widespread price increases continue to be a problem, with the prices paid index for services coming in at 70.3, with the three month average at 68.8. The three month average for manufacturing showed even more widespread pricing pressure at 75.4, meaning the economically weighted average was 71.2:

This is a “less worse” result than during spring, but is otherwise the worst since late 2022 (note that unlike the other three graphs, this one shows the last five years for better comparison).

To sum up, as of July the economically weighted ISM averages show an economy in reasonably strong expansion, but characterized by strong inflationary pressures and weak employment; i.e., a positive but stagflationary environment.

My updated “consumer nowcast” is up at Seeking Alpha; plus, more confirmation in the June JOLTS report

 

  - by New Deal democrat

Yesterday I posted the update of my “consumer nowcast” over at Seeking Alpha.  

As a refresher, this system looks at the various sources that can power increased consumer spending, which is 70% of the economy. When all of those sources are shut down, a recession almost invariably occurs. Unsurprisingly, the only significant source of such an increase this year has been appreciation in stock market portfolios among the upper income segment. 

This is fundamental evidence for my current view of the economy, which is that despite the chaos emanating from 1600 Pennsylvania Ave., the economy has been resilient, as manufacturers have found a modus vivendi with the tariff situation, and the big tax windfalls to the wealthiest of the wealthy have found their way into AI data center construction, which has been expansionary and lucrative for everything downstream. That being said, if the AI construction Boom proves to be a bubble (spoiler: I think it is), then the economy is open to a self-reinforcing negative cycle of stock market losses and pullbacks in consumer spending.

The JOLTS report for June was also released yesterday. This added very little to what we already knew about the employment situation: there is very little hiring, and even less firing, which nets out to slight improvement compared with last year. Here’s the situtation with the “soft data” of job openings postings (blue), actual hires (red), and voluntary quits (gold) normed to 100 as of just before the pandemic:

The small upturn since last autumn is apparent, and the slight improvement also shows up in the YoY comparisons of the same data, with both hires and quits being up less than 1% YoY, with openings up over 2%. I’ve also included layoffs and discharges (inverted, purple), which are down over -4% YoY):

To reiterate: hiring up slightly, firing down more. Here’s the firing data in absolute terms shown by itself:

Note the slight but apparent downturn beginning last November, which is also when jobless claims manifested a significant decline as well.

So my headline take on the economy remains the same: make no mistake, it is growing. But that growth is led by a narrow sector, and a narrow source of consumer spending. Pending more Administration-induced chaos.

August starts with a great ISM manufacturing report, but a dismal construction spending one

 

 - by New Deal democrat

As per usual, we start out the month with the ISM manufacturing report (for July) and the construction report (for June). The first was strong; the second was dismal.

Let’s start with the (mainly) good news first. The headline number for the ISM manufacturing report was 55.6 (any number above 50 signifying expansion), the highest since 2022. For forecasting purposes, I average the last three months, which comes out to 54.3:

The more leading new orders subindex rose to 56.7, and the three month average was 56.5:

Both the headline and new orders numbers indicate a strong expansion, which can be expected to continue at least a few more months.

The good news didn’t stop there, because employment rose into positive territory at 52.8. The three month average also crossed into expansion at 50.4:

The only aspect of the data which was negative was the prices paid subindex, which while it declined to 71.1, still indicated very widespread price increases upstream. The three month average was 75.4. These are readings very close to the post-pandemic inflationary peak:

This is of a piece with the regional Fed reports and other manufacturing and production reports, which have shown a surprising rebound this year, but a strongly inflationary one. For forecasting purposes, I weigh manufacturing at 25%, and the other 75% from the ISM services report, which will be updated Wednesday. But that has been consistently positive all year. So again, the message is: positive, but with a strong inflationary current.

But if manufacturing was good, the construction spending report was if anything recessionary. Total construction (blue in the graph below) declined -0.1% for the month, and is down -3.2% YoY. The more leading residential construction sector (red) declined -0.3% for the month, and is down -4.7% YoY. What makes these numbers worse is that they are nominal. The price of construction materials (gold) rose 1.4% in July and was up 9.0% YoY. The below graph norms all three to 100 just before the pandemic for easy comparison:

And here is a look at the YoY% change in both total and residential construction spending:

Quite simply, both are recessionary, especially when coupled with rising materials prices as was the case in 2006 but not in 2019. Of course, housing has been in recessionary territory for over a year - without a recession having occurred.

The dismal news continued in manufacturing construction spending as well, down -1.2% for the month and down -31% from its September 2024 peak:

The only reason this isn’t recessionary is that the building of factories isn’t a big enough part of the economy any more to be crucial.

Finally, here is an update on spending on power construction (blue, left scale) and water supply (orange, right scale), the two sectors most closely aligned with the AI data center Boom:

The former rose 0.6% for the month, and is up 3.5% YoY, while the latter declined -0.3% and is up only 0.9% YoY at this point. Keep in mind once again that these are nominal figures and don’t take into account the 9.0% increase in construction materials YoY.

These were two very dissimilar reports to start the month. The manufacturing sector is doing quite well, but the construction sector is doing quite poorly. That’s one positive leading indicator, and one negative. 

Weekly Indicators for July 27 - 31 at Seeking Alpha

 

 - by New Deal democrat

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

Unsurprisingly, the big move this week was in interest rates, which reacted very poorly to the Fed’s decision to keep rates steady, and especially to new Chairman Warsh’s comments essentially abdicating the Fed’s proactive role to the markets, and also a suggestion that the Board’s meetings would take place less frequencly.. In fact, since then it appears that several other members of the Board are in open rebellion, particularly against the latter suggestion.

In any event, as usual clicking over and reading will bring you up to the virtual moment as to the state of the data, and bring me a penny or two in lunch money.

Consumers’ strong spending contrasts with recessionary real incomes in June

 

 - by New Deal democrat

Here is my delayed write-up on yesterday’s report on personal income and spending in June. To cut to the chase, it continues this year’s paradigm of weak income but strong spending, likely fueled by the ‘wealth effect’ from stock market gains among the upper income levels. 

Let me start by reiterating that personal income and spending are among the most important of all monthly indicators, because they give us a detailed look at consumption by the broad range of American households. Further, since consumption leads employment, they also give us an idea of what is likely to happen with regard to jobs in the near future.

This morning’s data for June showed that, nominally, personal spending rose 0.3%, and personal income rose 0.2%. Since the PCE deflator declined -0.1%, real spending was up 0.4%, and real income up 0.5%. Here is what they look like since the pandemic:

As per my intro above, while real personal spending has continued to increase at a steady clip, real personal income has been flat and even worse for over a year. On a YoY% basis, real spending is up 2.5%, while real income is barely positive at 0.2%:

Although I won’t bother with a graph this month, historically when real personal income has been this low YoY, with the exception of several months in 2013, it has always meant a recession was already ongoing. On the other hand, since consumption leads employment, the still-strong spending suggests that the recent string of decently positive employment reports should continue for at least several more months:

With the -0.1% decline in PCE prices for the month, the YoY% change declined from 4.1% to 3.7%:

Nevertheless, aside from the post-pandemic inflationary spike, the only times this Milllennium that the PCE deflator has been higher were one month in 2005, and four months at the peak of gas prices in 2008. This is obviously not good.

Another important component of the data is spending on goods, and in particular durable goods, which is a leading indicator. Historically, the pattern has been that real spending on goods (blue in the graph below) turns down in advance of recessions, and in particular spending on durable goods (red), which tends to turn down first. Real spending on nondurable goods (gold) has tended to turn down last, while real spending on services (purple) has tended to rise even during all but the most prolonged or deep recessions. 

June was a good month for all of these metrics, as real spending on goods (blue) increased 0.7%, and on durable goods (red) increased  a sharp 1.5%. Real spending on nondurable goods (gold) rose 0.3%, as did real spending on services (purple). The below graph is normed to 100 as of March of last year, to show the stall in the two most leading metrics for the remainder of last year, together with the rising trend this year:

The difference in robust personal spending and anemic personal income is explained by the downward trend in the personal saving rate, which declined -0.1% to 2.7% in June:

This has been trending down since 2004, and is now at nearly its post-pandemic low. Further, although I won’t bother with the historical graph this month, it is also in the range of its lowest readings, which remained below 3% from 2005 through early 2008. This means two things: first, that consumers in June remained confident enough to continue spending despite the income constraints, but also that this spending is very vulnerable to any adverse shock (like $6 gas and/or the bursting of a financial bubble).

This report also allows us to update two important data series used by the NBER to date recessions. 

The first of these is real income less government transfers (like Social Security payments or unemployment benefits). This increased 0.2% in June, the second increase in a row. But this is still only 0.1% higher YoY (red, left scale), and -0.7% below its peak last September (blue, right scale):

The second important coincident indicator, real manufacturing and trade sales, which is delayed by a month, increased 0.4% in May, but is also -0.4% below its peak in February:

But if these two coincident markers are recessionary, other components, including industrial production (blue), employment (red), and as discussed above real consumption (dark gray), have made new highs as of the last monrth:

To sum up, consumers’ real incomes on average continue to languish, but their aggregate consumption continues to be strong. Production and sales have also been powering this year’s rebound from the near-miss or mini-recession of last summer and autumn. But households are continuing to dig into their savings. Unless incomes start to improve in real terms, then any reversal could easily lead to consumer retrenchment and a downturn. But we’re not there now. 

Q2 GDP: ‘meh’ and good headlines matched by ‘meh’ and good leading indicators for 2027

 

 - by New Deal democrat

Note: I will post my long write-up about personal income, spending, and saving tomorrow morning. 

As per usual, my focus on the GDP report is less on the topline numbers than on the two leading indicators - real spending on housing and proprietors’ income - contained therein. And to get to the point, the upshot is ‘meh.’

Let’s get the headlines out of the way first. Nominally GDP increased 7.9% annualized in the Q2, but since the GDP deflator increased 5.7%, real GDP (blue) increased only 1.5% annualized, which is relatively weak compared with the past few years. On the other hand, “core” real GDP, i.e., real final sales to domestic purchasers (red) increased a very strong 3.7%.  Here’s what the quarterly real gains look like over the past four years:

The difference between the two was due to a very large depletion of inventories:

In other words, relatively less product made, relatively more out of inventory and sold.

Here’s what the YoY% change in real GDP and real final sales look like over the same period:

For all of the chaos coming out of Washington, this almost looks like an economy on cruise control.

But for some information about what might be coming down the road, vs. what happened this past spring, let’s look at out two long leading indicators.

Real private residential fixed investment, a proxy for housing, increased 1.2% in the quarter, which is positive:

But the real long leading indicators is the above metric as a share of GDP, and so measured, that remained constant at 3.1%:

In other words, neutral. It’s worth noting, though, that as suggested in the far left of the above graph, this metric tends to bottom at or even a little before the end of recessions. So if anything, this adds a little bit to the evidence that the economy might be on a rebound.

The other long leading indicator is corporate profits deflated by unit labor cost. But since neither of those will be reported for one more month, we can make use of the placeholder of proprietors’ income, which is almost as leading. And this income rose 1.2% nominally in Q2 (blue), a fairly strong advance to a new high:

Since in the past few years unit labor costs (gold) have risen on average about 0.5% per quarter, it is almost certain that deflated proprietors’ income made a new high as well:

Recently I’ve indicated an added emphasis on the role that the increase or decrease in corporate profits have as a long leading indicator for the economy. Taken together, we have one ‘meh’ indicator and one that remains positive, suggesting that left to its own devices the economy would be likely to remain in expansion for another year.

Initial claims continue very positive for the economy, near 50+ year lows

 

 - by New Deal democrat

FRED has been very slow about updating either personal income and spending or Q1 GDP data graphs, so while I am waiting let me update with the weekly jobless claims information. To cut to the chase, it continues to be positive, and continues to forecast a further declilne in the unemployment rate.

Initial claims rose 9.000 to 197,000, still among the very best readings in over 50 years, while the four week average declined -5,000 to 202,750, also among the lowest in over 50 years. With the typical one week delay, continuing claims declined -7,000 to 1.782 million:

As per my bullet point above, on a YoY% change basis, initial claims were down -10.0%, the four week average down -8.5%, and total claims down -8.0%:

These are strongly positive short leading readings for the economy. Additionally, since jobless claims lead the unemployment rate, here is the latest update on that comparison:

Accordingly, I expect the unemployment rate to hold decline further in the next few months. We’ll see next week.