January ADP private employment and ISM services reports show increasing stagflation in a weakly growing economy

 - by New Deal democrat

[Administrative note: the good news is, graphs are back! The bad news is, it is extremely glitchy and energy consuming, so my fingers are still crossed. Basically it boils down to Apple and Google don’t want to interact with one another, and have to be repeatedly dragged, kicking and screaming, into a converation. AARRGH!!]

With official economic data delayed once again by the brief government shutdown, once again we must rely on private sources to at least sketch the contours of the economy.

This morning we got two important portions of that sketch. First, the ADP private employment report indicated an increase of only 22,000 jobs in January (blue), with only 1,000 of those in the goods-producing sector. Within that sector, manufacturing shed another 8,000 jobs (red), while construction added 9,000 (gold):

In the past year, only 280,000 private sector jobs have been added in total in the entire economy, an average of only 23,000 per month. The construction sector added 43,000, while manufacturing declined every single month and lost a total of -159,000.

But if the first report of the morning confirmed a moribund, if not outright contracting employment sector, the other news, in the ISM services report, showed that the 75% or so of the economy that is that sector continued steady if not strong expansion. The headline number was unchanged at 53.8, while the three month average was 53.4 (recall that any number above 50 means expansion) [Note that in each graph below I also show the equivalent sector reading from the ISM manufacturing report earlier this week in gray]:

 

New orders decelerated -3.4 to 53.1, with a three month average of 54.2:

Employment also decelerated by -1.4 to almost a complete halt at 50.3, while the three month average also came in at 50.3:

Note that the ISM manufacturing and services reports are in almost complete accord with the ADP private payrolls report. Both showed weak, but positive, employment growth in the services sector, while the nearly stagnant goods sector and contraction in manufacturing in the ADP report was similar to the continuing contraction indicated earlier this week in the employment reading from the ISM manufacturing report.

Finally, prices paid increased 1.5 to 66.6:

The (relatively) good news is that this is still well below the readings from earlier last year. The unequivocal bad news is that prices paid in both the manufacturing and services sectors showed marked increases over the course of the last year. In other words, inflationary pressures have been building in the pipeline at the same time as employment growth has stalled.

Finally, here are the three month averages for both the headline and new orders indexes, economically weighted at 75% for services and 25% for manufacturing:

Headline: services 53.4, manufacturing 49.5 -> economically weighted average 52.4

New orders: services 54.2, manufacturing 50.6 -> economically weighted average 53.3

Recall that I use this economic weighting as a short leading forecast for the economy as a whole; and needless to say this indicates that a steady if not strong expansion is likely in the next few months, despite the weakness in the jobs environment.

And speaking of job, when the official January report is released, I will be looking for a continued stall or even decline in goods-producing jobs, but also an increase if a lackluster one in service providing jobs. Note that the report will also include adjustments in last year’s numbers as well.

The State of Freight is Mainly Recessionary

 

 - by New Deal democrat

This morning we were supposed to get an actual, on-time JOLTS report for December. But with Pastor Mike Johnson having done what he does best, i.e., keeping the House of Representatives out of session while critical deadlines pass, the BLS announced yesterday that several reports, including both Friday’s jobs report for January, and the aforementioned JOLTS report, have been delayed. This is simply no way to run a first world government.

So in place of what had been scheduled, let’s take a look at the state of freight. To cut to the chase, it remains at least borderline recessionary.

To begin with, although heavy duty truck sales rebounded somewhat in December, up from their post-pandemic low of 336,000 annualized in November to 392,000, even on a three month average basis they are down -3.4% from their peak in 2023. As the graph linked to below shows, with the exceptions of 1996 and 2016, such a decline has otherwise in the past always meant a recession is near: 

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

What hasn’t happened yet (not shown above) is for a significant decline in light vehicle sales to also decline significantly.

Another important way of looking at the components of transportation is the Truck Tonnages Index (blue in the graph linked to below), Freight Railcar Index (red), and Vehicle Miles report (gold), all of which are amalgamated into the Freight Tansportation Services Index (black), which was just reported yesterday showing a 1.2% increase in November:

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

Rail freight carloads have been in a secular declined for several decades, that that slow decline has generally continued since the pandemic, after a spurt in 2021. Meanwhile, truck tonnages have also declined. What has increased, and has steadied the overall Index, is vehicle miles traveled.

I have found that the best way to look at the Freight Transportation Services Index is to compare it with the privately compiled Cass Freight Shipments Index, both of which are shown in the graphs below. Because the latter is not seasonally adjusted, both are shown in YoY% terms. Additionally, in the past the Cass Index has been too volatile to the downside to be useful on its own as a recession predictor. So in both graphs linked to below, 5% is added to the calculation, because a Cass value of a bigger YoY decline than -5%, that continues for several months, and coincides with a negative YoY reading from the Freight Transportation Services Index, has been the best combined indicator.

First, here is the long term historical view before the pandemic:

And here is the recent, post-pandemic view:

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

The Cass Index has indeed been lower by more than -5% YoY for the past six months. But the Freight Transportation Services Index has not confirmed the downturn, as it has been positive YoY for all but one of those months (note the Cass index has been updated through December while the government index has not).

Until the official index turns down for several months, the combined indicator while anemic is not showing recession.

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