December ISM manufacturing report: continued contraction, continued stagflation, poor employment

 

 - by New Deal democrat

We are still suffering the data aftereffects of the government shutdown. Normally we begin each month with reports on both construction spending as well as manufacturing. But the construction report even now has only been updated through August, and won’t be updated for September and October until January 21. And by the way, the current spending bill expires on February 1, so another shutdown may be around the corner.

Which means, as I have said repeatedly for the last month or more, that the regional Fed manufacturing and services reports, as well as the ISM manufacturing and services reports, are our best contemporary picture of the economy.

And this morning’s ISM manufacturing report for December confirms what the regional Fed reports were telling us: the forward-looking situation is improving, in the sense of being “less bad,” while prices paid increased remain widespread, even if not so much as earlier in 2025, and employment in the goods producing sector continues to contract.

In more detail, the headline number declined -0.3 to 47.9 (recall that any number below 50 means contraction), the lowest reading since October of 2024; but higher than most readings in 2023 and 2024:

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

The more forward looking new orders component increased 0.3 to 47.7, generally continuing the “less bad” trend of the latter part of 2025 and more broadly, since 2023:

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

On the other hand prices paid were steady at 58.5, lower than the readings approaching 70 last spring, but aside from that higher than all but one reading in 2023 and 2024:

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

And employment remained dismal at 44.9, up 0.9 for the month, but on a three month rolling basis continuing the declining trend since the middle of 2024.

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

This suggests a further decline in goods-producing jobs when we get the December employment report at the end of this week.

For forecasting purposes, I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively.

With today’s report, the three month average for the headline number is 48.3. The more significant news is that the three month average of the more leading new orders subindex declined slightly further to 48.2. At the same time, both remain slightly better than their low points in 2022-23, which is noteworthy because there was no recession then.

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 54.4 and 54.5, respectively. Needless to say, if the services sector remains as strong in December as it has been in October and November, then the weighted average is going to remain signficantly in expansion territory.

To sum up, the ISM manufacturing report for December, to which I would give more wight, confirmed the average of the regional Fed manufacturing reports for the month. Those indicated a stabilizing to slightly contracting manufacturing sector, with contracting employment,  and also facing continuing stagflationary price pressures. 

There has been a very significant divergence in 2025 between the regional Fed services reports, which have indicated pronounced weakness, vs. the ISM services reports, which for all months but one this past summer have indicated good growth. On Wednesday we will see if this continues, or whether services are also beginning to weaken.

Weekly Indicators for December 29 - January 2 at Seeking Alpha

 

 - by New Deal democrat

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

As 2025 ended, all of the important trends seemed to intensify. The US$ is down 10% YoY by one measure, commodities are higher by the same or more, oil prices continued to fade, and the recent waning in the YoY growth of withholding tax payments - by at least one measure - intensified.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two for my efforts collecting and collating it for you.

Economic year end summary for 2025: housing, jobs, and real income stagnant, while spending powers forward

 

 - by New Deal democrat

There is no new noteworthy data today; and the ISM manufacturing index, normally released on the first workday of each month, won’t be released until Monday, so today is an ideal time to check in on the state of the economy in general, and of housing in particular, at the end of 2025.

On Tuesday, both the FHFA and Case Shiller repeat home sales indexes were released for October, with both rising 0.4% month over month on a seasonally adjusted basis. The former index did make a new high, while the latter is still slightly below its February 2023 peak:

 https://fred.stlouisfed.org/graph/?g=1PGCd 

On a YoY basis, both are up roughly 1.5%, among the lowest such comparisons of any time outside of recessions:

 https://fred.stlouisfed.org/graph/?g=1PGCx 

Thus 2025 closes out on a very weak note for housing, which has been a theme throughout the year.

On a broader scale, it is possible that the October and November government shutdown constituted a brief recession, with July as the peak of the post-pandemic expansion:

 https://fred.stlouisfed.org/graph/?g=1PzJV 

As shown in the graph, which norms nonfarm payrolls, industrial production, real manufacturing and trade sales, and real income less government transfers to 100 as of July, only two of the four - real income and payrolls - exceeded their July readings only once, in September, by 0.1%. All other readings since July have been either flat or down, with several not updated yet since the shutdown.

Indeed, taken together, the four series generally show stagnation since March or April. 

It is commonly said that expansions don’t die of old age; they are murdered. If so, the combination of T—-p’s tariffs and the government shutdown may have done the trick, at least briefly.

On the other hand, one item which has consistently held up, however, has been consumer spending, best shown by the weekly Redbook index:

 https://tradingeconomics.com/united-states/redbook-index 

This has shown strength throughout the year, typically up by over 5% YoY nominally. This in turn has probably been goosed by the wealth effect from the appreciation in affluent and wealthy peoples’ stock portfolios, with the S&P 500 up 16.4% in 2025:

 https://fred.stlouisfed.org/graph/?g=1PGEn 

Indeed, as per the last ISM reports, for November, manufacturing continued to be in contraction, while services, which were oscillating between slight expansion and contraction through summer, picked up some strength in October and November:

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

This is the “K shaped” economy, where the lower 80% or so are feeling pinched by inflation and a stalling jobs market, while the top 10% can power forward with spending.

I expect that in 2026 the forces of stagflation will continue to conflict, with a politicized Fed lowering rates to please its mob boss, while inflationary pressures mount, and the average household is caught in between.

Regional Fed services indexes suggest future expansion, but weak employment in the face of strong inflationary pressures

 - by New Deal democrat 

Although the federal government shutdown has been over for a month and a half, most of the data that has been released has lagged badly, especially including data on sales, spending, and business orders. That means that the most current measures of these are the ISM manufacturing and non-manufacturing reports, due Friday of this week and Monday 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 Monday I looked at the goods producing sector. Now that the Texas Fed has reported, here is the Services sector.

As with the manufacturing chart, month over month changes are in parentheses, showing momentum (the 2nd derivative), with the absolute diffusion values for November following. 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:  (+1.7) -20.0; (-0.5) -16.8; (+4) -11; (+10) 3; (-1) -2.3; (+2.8) -9.6     

Cap Ex   (+0.2) -6.9; (+10.6) 10.6; (-6) -9; (+14) 9; (+3.6) 23.6; (+3.5) 5.5

Prices Paid  (+10.2) 72.1; (+5.6) 40.3; (+1.3) 6.1; (+2) 34; (-1.4) 26.2; (+3.3) 35.7

Prices Rec’d (+10.4) 30.5; (-3.0) 19.0; (+0.1) 3.2; (-4) 10; (+1.4) 7.9; (+0.9) 14.1  

Wages (-1.7) 23.7; (-3.2) 46.1; (+5) 17; (-11) 13; (-3.9) 10.8; (-3.0) 22.1 

Employment (-1.2) -7.4; (+7.1) 9.6; (+4) 5; (+10) -6; (-3.9) -0.8; (+3.2) 0.0

The only clear positive trend is strong CapEx growth, implying building capacity for increased demand in the future. Wages also continued to show broad growth, although they may be growing too fast for the underlying business conditions. By contrast, headline business conditions continued to indicate contraction, although less than in November, and employment was dead in the water. Meanwhile both prices paid and prices received continued to show broad increases, the former more than the latter. This suggests sustained services inflation will continue, and even perhaps amplify in the months ahead. 

On Monday I summarized the manufacturing situation thusly: “The December regional Fed reports suggest that while new orders have continued to be positive, the increasing trend has abated, with overall actual contraction of production. Prices paid by manufacturers continue to increase, but at a slower pace, while the prices they receive have firmed. Meanwhile employment is barely positive, but wage growth continues.”

When we examine both the manufacturing and services sector in full as reported by the regional Feds in December, giving much more weight to services as per their share of the economy, we see promising signs of future expansion,  but stalling present production and employment, in the face of continued inflationary prices both at the commodity and final demand levels. Whether wage growth can continue to match this is very much at issue, as wage growth tends to follow employment growth (or lack thereof). If the trends continue, strong inflation and weakening wage growth are a recipe for a consumer led recession.

Positive trend in jobless claims continues through year end

 

 - by New Deal democrat

[Note: Yesterday was a travel day, and I didn’t get around to posting the regional Fed services survey averages for December. I’ll try to get to that later today.]

The last weekly jobless report continues the trend of an improved picture - as in, very few people are getting laid off - that has typified the second half of this year.

Initial jobless claims declined -16,000 to 199,000, the second best reading all year, and one of the very best in the entire last 50 years. The four week moving average increased 1,750 to 218,750, still close to the lowest readings this year. With the typical one week delay, continuing claims declined -47,000 to 1.866 million, among the best readings in the past six months. Here’s a link to the last four years of data:

 https://fred.stlouisfed.org/graph/?g=1PAGT 

The above view shows how post-pandemic seasonality has not been expunged from the seasonal adjustments. Claims have risen in the first half of the year, peaked in early summer, and then declined towards the end of the year. Such has been the case this year as well, although the trend has been more muted. Additionally, note that this was for Christmas week, which like Thanksgiving week is notoriously hard to seasonally adjust, so take this big weekly decline with extra caution. The four week average, while very good, is likely giving a truer picture.

As per usual, the YoY% changes are more important to my forecast. There, initial claims were lower by -4.8%, and the four week average down -1.6%. Continuing claims remained higher, by 2.1%:

 https://fred.stlouisfed.org/graph/?g=1PAHw 

Since mid-year, more weeks than not initial claims have been lower YoY, while continuing claims have been higher, but even that increase has faded since the beginning of November. Needless to say, this suggests the economy will continue to expand over the next several months.

Although I won’t bother with the graph this week, since jobless claims typically lead the unemployment rate, and one year ago the unemployment rate was 4.1%-4.2%, the improvement in claims over the last six weeks suggests that the unemployment rate is likely to decrease from its November high of 4.5%.

Regional Fed manufacturing indexes suggest 2025 trends are slowly abating

 

 - by New Deal democrat

Although the federal government shutdown has been over for a month and a half, most of the data that has been released has lagged badly, especially including data on sales, spending, and business orders. That means that the most current measures of these are the ISM manufacturing and non-manufacturing reports, due later this week and 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. With the last regional manufacturing index reported this morning, here is the December update for that 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 December following. The final number is the average change and absolute number for all 5 together.

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

Headline:     (-22.6) -3.9; (-8.5) -10.2; (+8) -7; (-7) 1; (-0.5) -10.9; (-7.5) -5.2          

New Orders (-15.9) 0.0; (+13.6) 5.0; (+14) -8; (+2) 0; ( -11.2) -6.4; (+0.5) 1.9 

Prices Paid  (-11.4) 37.6; (-13.5) 43.6 (-0.3) 6.5; (+4) 40; (+0.7 ) 36.0; (-4.1) 31.5 

Prices Rec’d (-4.2) 19.8; (+6.7) 24.3; (+1.9) 5.0; (+9) 22; (-2.6) 6.2; (+2.1) 15.5

Wages* (n/a) n/a; (n/a) n/a; (0) 24; (n/a) n/a; (+6.4) 21.8); (+3.2) 23.0

Employment  (+0.7) 7.3; (+6.9) 12.9; (+6) -1; (-15) -4; (-3.3) -1.1; (-0.9) 2.8

____

* only 2 of the banks report this information

Last week durable goods and core capital goods orders were updated through October, showing a -2.2% decline and a 0.5% gain, respectively. On a YoY basis, the trend of increasing strength has continued, at +4.8% and +6.2% respectively:

 https://fred.stlouisfed.org/graph/?g=1Pvmw 

The December regional Fed reports suggest that while new orders have continued to be positive, the increasing trend has abated, with overall actual contraction of production. Prices paid by manufacturers continue to increase, but at a slower pace, while the prices they receive have firmed. Meanwhile employment is barely positive, but wage growth continues. 

Tomorrow the Texas Fed will report on that region’s service sector, and that (larger) portion of the economy for December can be examined as well.