The economically weighted ISM average indicates economy expanding nicely, but likely in latter stage of the cycle

 

 - by New Deal democrat

[I was busy doing my civic duty the past few days. I’ll have something to say about the election at some point later, but not now.]

Yesterday the ISM services report came in very strong for the second month in a row, with the headline at 56.0 and the more leading new orders subindex at 57.4:

This is important, because services are roughly 3/4’s of the economy.

To reiterate, because manufacturing is of diminishing importance to the economy, and was in deep contraction both in 2015-16 and again in 2022 without any recession occurring, I now use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

Here are the last six months, including September, of both the manufacturing (left column) and non-manufacturing index (center column) numbers, and their monthly weighted average (right) :

MAY 48.9. 53.8. 52.5

JUN 48.5. 48.8. 48.7

JUL. 46.8. 51.4. 50.2

AUG. 47.2. 51.5  50.4

SEP. 47.2. 54.9  53.0

OCT. 46.5. 56.0  53.6

And here is the same data for the new orders components:

MAY 45.4. 54.1. 51.9

JUN. 49.3  47.3. 47.8 

JUL.  47.4. 52.4. 51.2

AUG. 44.6. 53.0. 50.9 

SEP.  46.1. 59.4. 56.1 

OCT. 47.1. 57.4. 54.8

The three month economically weighted headline number is 52.3, and for the more leading new orders index is 53.9.

The gist of this is pretty clear: while goods production is in contraction, services provision is expanding strongly. The expansion is in good shape for the immediate future. If there is a caution here, it is that as expansions age, goods production tends to wane while services continue to grow. This suggests pretty strongly that, even if no recession is close at hand, the expansion is likely in its latter half.

Weekly Indicators for October 28 - November 1 at Seeking Alpha

 

 - by New Deal democrat

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

There’s always some noise in the high frequency data, and this week that noise was in the positive direction, as almost all of the coincident data shows strength.

On the other hand (and this is the economy we’re talking about, there’s always an “other hand,” long term interest rates increased, which made a major dent in mortgage related markers. This is called a “bearish steepening,” becuase the yield curve gets more un-inverted, but not because of lower rates.

As always clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for correcting and organizing it for you.

ISM manufacturing poor again in October

 

 - by New Deal democrat

As usual, next week there will be a dearth of economic data, so I’ll report on construction spending then.

In the meantime, we got another poor ISM manufacturing report, with the total index declining to 46.5, the lowest reading this year, while the more leading new orders component increased 1.0 to 47.1. As a refresher, any reading below 50 means contraction.

Because manufacturing is of diminishing importance to the economy, and was in deep contraction both in 2015-16 and again in 2022 without any recession occurring, I now use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

Including October, here are the last six months of both the headline (left column) and new orders (right) numbers:

MAY 48.9. 45.4

JUN 48.5. 49.3

JUL. 46.8. 47.4

AUG 47.2. 44.6

SEP 47.2. 46.1

OCT 46.5. 47.1

Here is what they look like graphically:

The three month average for the manufacturing index is 47.0, and for the new orders component 45.9. For the past two months, the average for the non-manufacturing headline has been 53.2 and the new orders component has been 56.2. That means the threshold for the October non-manufacturing numbers is roughly 49 and 41 (!)  respectively for the economically weighted average not to forecast recession. That seems pretty unlikely.

October jobs report: Milton mayhem!

 

 - by New Deal democrat

Well, I warned you . . . .

I expected a downdraft from the hurricanes, especially Milton, and also the Boeing strike. And boy did we get one!

Let me be clear: if there were no special factors, this report would be recessionary, period. And there were some signs of real weakness in this report that do not appear to be hurricane-related. But Hurricane Milton, as well as the strike, had an impact, so take this report with a gigantic helping of salt.

Here is what the BLS had to say in releatant part:

“Hurricane Milton struck Florida on October 9, 2024, during the reference periods for both surveys. Prior to the storm’s landfall, there were large-scale evacuations of Florida residents.

“In October, the household survey was conducted largely according to standard procedures, and response rates were within normal ranges.

“The initial establishment survey collection rate for October was well below average. However, collection rates were similar in storm-affected areas and unaffected areas. A larger influence on the October collection rate for establishment data was the timing and length of the collection period. This period, which can range from 10 to 16 days, lasted 10 days in October and was completed several days before the end of the month.

“…. It is likely that payroll employment estimates in some industries were affected by the hurricanes; however, it is not possible to quantify the net effect[s] … because the establishment survey is not designed to isolate effects from extreme weather events. There was no discernible effect on the national unemployment rate from the household survey.”

Below is my in depth synopsis.

HEADLINES:

• 12,000 jobs added. Private sector jobs *declined* -28,000. Government jobs increased by 40,000. 
• The pattern of downward revisions to the last two months resumed. August was revised down ward by -81,000, and September by -31,000, for a net decrease of -112,000.
• The alternate, and more volatile measure in the household report, showed a decrease of -368,000 jobs. On a YoY basis, this series has only risen by 216,000 jobs, which remains consistent with recession, as it has for months. On the other hand, it is an improvement from two months ago, where there was an actual YoY decline.
• Surprisingly, the U3 unemployment rate remained steady at 4.1%, which also means the “Sahm rule” recession indicator is no longer in effect. The rounding of data was particularly important this month. If we go out a couple more decimal points, the rate increased from 4.051% in September to 4.145% - almost a 0.1% increase.
• The U6 underemployment rate also remained steady at 7.7%, still 1.3% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now declined -31,000 to 5.666 million, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. This month they were almost all negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, declined -0.1 hour to 40.6 hours. This remains down -0.9 hours from its February 2022 peak of 41.5 hours, but on the other hand is only -0.2 hours below its 18 month high.

• Manufacturing jobs declined -46,000. This is the second month in a row for this decline.
• Within that sector, motor vehicle manufacturing jobs declined -6,000. 
• Truck driving declilned -100.
• Construction jobs increased 8,000.
• Residential construction jobs, which are even more leading, rose by 1,300 to another new post-pandemic high.
• Goods producing jobs as a whole declined -37,000. Because these typically decline before any recession occurs, in the absence of special factors this would be a serious red flag for oncoming recession.

• Temporary jobs, which have generally been declining late 2022, fell by another -49,000, and are down -577,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer declined -34,000 to 2,112,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.12, or +0.4%, to $30.48, for a YoY gain of +4.1%. Their post pandemic peak of 7.0% in March 2022. This was also 0.2% higher than their recent low in July. Most importantly, this continues to be significantly higher than the 2.4% YoY inflation rate as of last month.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers *declilned* -0.3%, but remains up 1.1% YoY, only slightly below its trend for the past 12+ months.

•  the index of aggregate payrolls for non-managerial workers was rose 0.1%, and is up 5.2% YoY. These have been slowly decelerating since the end of the pandemic lockdowns, and that trend continued this month, which was just slightly above the post-pandemic low. Nevertheless, with the latest YoY consumer inflation reading of 2.4%, this remains powerful evidence that average working families have continued to see gains in “real” spending money.

Other significant data:

• Professional and business employment fell -47,000. Moreover, there were significant revisions to this series, which now show a relentless decline for the last five months. These tend to be well-paying jobs. As of this month, they are only higher YoY by 0.1% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions. 
• The employment population ratio declined -0.2% to  60.0%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate declined -0.1% to 62.6%, vs. 63.4% in February 2020. The prime 25-54 age  participation rate declined -0.3% to 83.5%, vs. 84.0% in July, which was the highest rate during the entire history of this series except for the late 1990s tech boom.
• Of particular importance this month is the change in those on temporary layoff, up 214,000, vs. permanent job losers, up 153,000. This suggests that about 60% of the negative news this month was transient, but about 40% of the decline was more structural.

SUMMARY

To reiterate what I said in the opening, if there were no special factors, this report would be outright recessionary. Private jobs declined, manufacturing declined, motor vehicle production and trucking employment declined, goods producing jobs as a whole declined, professional and business jobs declined; and finally, the unemployment rate, before rounding, rose 0.1%. This is recessionary.

While -44,000 of that decline appears to have been the strike at Boeing, now resolved, on the other hand, leisure and hospitality jobs, of which Florida has plenty, only declined -4,000 in October. And the downward revisions to professional and business jobs are very concerning. 

Again, to reiterate my last bullet point above this summary, as a back of the envelope estimate, I would take 60% of this month’s decline as temporary, but 40% real. Since this report showed a -211,000 decline in new jobs from September’s +223,000 pace, my best guess as to what this report would have shown in the absence of Milton and the Boeing strike is an increase of +127,000 jobs.

September personal income and spending: another positive report across the board

 

 - by New Deal democrat

The monthly personal income and spending report is now the most important report of all, except for jobs. That’s becuase it tells us so much about the state of the consumer economy. It is the raw material for several important coincident indicators that the NBER looks at, as well as several leading indicators on the spending side.

This month’s report for September was absolutely solid if not stellar, as every single important number was positive.

To begin with, nominal personal income rose 0.3%, and spending rose 0.5%. After adjusting for PCE inflation, which rose 0.2%, the former increased 0.1%, and the latter rounded to a gain of 0.4% (graph normed to 100 just before the pandemic). Both are at all-time highs:

In historical terms, spending on goods tends to rise more during the early part of an expansion, and be overtaken by real spending on services in the latter part of an expansion. Additionally, spending on services tends to rise even during recessions. So the more important component to focus on is real spending on goods. This rose a strong 0.7%. Meanwhile - par for the course - real spending on services increased 0.2%. Again, both made another all-time high:

On a YoY growth basis, real spending on services remains slightly higher than real spending on goods, at 3.2% vs. 2.8%.

Prof. Edward Leamer’s business cycle model indicates that spending on durable goods (dark blue, left scale) tends to peak first, before nondurable or consumer goods (light blue, right scale). In September the former rose 0.4%, and the latter 0.8% in real terms, yet again both at all time highs (the former excepting the two binge-spending stimulus months in 2021):

As indicated above, PCE inflation rose +0.2% for the month. On a YoY basis, PCE inflation is 2.1%, the lowest since February 2021 and only slightly higher than its average during the five years before the pandemic:

To reiterate a point I’ve made many times, with the exception of shelter costs in the CPI, the Fed’s inflation target has really been met.

While it wasn’t a negative, if there was a slight blemish in this report it was that the saving rate declined -0.2% to 4.6%. This compares with January’s recent high of 5.5%. The below graph subtracts -4.6% so that the current reading shows at the zero line, indicating that the current rate is now a little below the average rate in the decade before the pandemic:

The willingness to spend more and save less in a lower inflation environment speaks to consumer confidence. On the other hand, it does leave consumers a little more vulnerable to an adverse economic shock.

Finally, as indicated above this report goes into the calculation of two important coincident indicators. The first is real personal income less government transfer payments. This rose 0.1%, still another all-time record:

Second, with the usual one month delay, real manufacturing and trade sales rose less than 0.1%, rounding to unchanged, nevertheless ever so slightly at a new all-time record:

This was the third excellent report in a row, and blows away any speculation that the economy might not be still expanding. The only soft spots were real spending on goods, which continues to grow slightly less than for services, suggesting we are later than halfway through this expansion; and the slight decline in the personal saving rate. Everything else was, well, just fine.

Jobless claims: with hurricane effects abating, claims return to normal

 

 - by New Deal democrat

It appears that, as I suspected earlier this month, the big YoY jump in initial jobless claims was largely due to the effects of the hurricanes, and is now abating.

First, for the week initial claims declined another -12,000 to 216,000. The four week moving average declined -2,250 to 236,500. With the typical one week delay, continuing claims declined -26,000 to 1.862 million:

The good news is that, on the more important YoY% change basis for forecasting purposes, initial claims were completely unchanged from one year ago. The four week moving average remained higher by 12.4%. By contrast, for the past two weeks (light blue in the graph below), initial claims were up only 7,500 from one year ago, or +3.5%. Continuing claims were higher by 2.5%:

These are quite simply not recessionary at all.

Even more striking, the situation would be even better excluding Florida, which was so heavily impacted by Hurricane Milton. Compared with one week prior, initial claims in Florida one week ago were higher by 4,500 (not seasonally adjusted) and were higher YoY by 7,100. In fact, half of all initial claims in the US were in Florida. In other words, initial claims one week ago would probably have only been higher by about 3.5% excluding Florida.

If this situation goes on one more week, we can safely put the two week scare from earlier this month behind us.

Finally, here is the look at initial and continuing claims vs. the unemployment rate, since the former leads the latter:

The unemployment rate has been rising due to new entrants (immigrants) into the labor force having a harder time finding work. The suggestion is that with recent weakness in claims, it will probably rise another 0.1% or 0.2%, although not necessarily tomorrow.

Real GDP for Q3 nicely positive, but long leading components mediocre to negative for the second quarter in a row

 

 - by New Deal democrat

As usual, I’ll take a quick look at this morning’s headline GDP numbers for Q3 before passing on to my more important focus on the release’s leading components. 

Real GDP grew at a 2.8% annualized rate in Q3. Just like Q2, this is a perfectly good number in line with the past three years:

Stripping out inventories as well as imports and exports gives us real final sales to domestic purchasers, which grew 0.9% for the quarter or 3.8% annualized, also very healthy:

And the GDP deflator increased 0.4%, or at an annualized rate of 1.8%. This is a perfectly benign rate going back to the start of the Millennium:

While the coincident headlines were all very good, more importantly going forward, for the second quarter in a row, both of the long leading indicators contained within the GDP report declined.

First, private fixed residential investment as a share of GDP, a proxy for the housing market, declined both in nominal (blue, -1.8% q/q) and real (red, -2.0% q/q) comparisons:

This housing measure is back down just above its H1 2023 lows. While this doesn’t scream recession, both the generally flat trend of the past several years (with the supply chain tailwind now gone) and the back to back slight declines for two quarters in a row indicate a slight drag on the economy going forward.

Secondly, while nominally proprietor’s income, a proxy for corporate profits (which won’t be reported for another month), rose by 0.6%. After applying the GDP deflator, which came in at 0.4%, real proprietor’s income rose only 0.2%:

This isn’t negative, but it certainly is mediocre. 

In summary, one of the two long leading indicators is negative for the economic outlook for 2025, while the other is neutral. 

Continued resilient real consumer income and spending is keeping the economy growing in the present and short term future, but a few quarters out the two long leading components not consistent with any robust growth.

Because of the unique impact of the un-kinking of the supply chain issues in 2022 into early 2023, I haven’t comprehensively updated my look at long leading indicators in quiete a while. It looks like time to restart.