Economically weighted ISM services + manufacturing indexes show expanding economy, stagnant employment, and rampant inflationary pressures

 

 - by New Deal democrat

The economically weighted ISM manufacturing + services indexes have become one of my favorite datapoints. That’s in part because the former has a nearly 80 year history of being a solid leading indicator, although somewhat attenuated since the start of the Millennium. But the latter now also has a long enough track record that their combined weight has been accurate for the pat 25 years. The second reason is because they are very current: for example, this week’s reports are for May - as opposed to measures like durable goods, which are delayed one to several months.

To recapitulate, since services are about 75% of the economy, they are 75% of the weighting, with the manufacturing report being the other 25%. Additionally, to reduce noise and increase signal, I pay particular attention to the three month moving average of the weighted average. The one drawback of these is that they are diffusion indexes. They do not tell us how “strong” a trend is, but rather how widespread. For example, if 50% of businesses say they are adding employees, 30% say they are laying off employees, and 20% report no change, the number is calculated as 50-30=+20, /2 = +10. Since 50 is the neutral reading 50+10=60. 

On Monday we got the manufacturing report, which was very positive for new orders, but showed a contracting jobs situation, and widespread price increases. This morning’s ISM services report was similar. [Note: in all the graphs below, the manufacturing number is in blue, and the services number in gray].

Let’s start with the headline number, which rose +0.9 to 54.5. But the three month average declined by -0.6, to 54.0. This compares with the manufacturing three month average of 54.8, the weighted average is 54.2:

New orders rose 1.8 to 57.3, although the three month average declined -0.5 to 57.1. Since the manufacturing average was 54.7, the weighted average is 56.5:

In other words, both the headline and the more leading new orders indexes were strongly positive.

But as with manufacturing, the employment situation is not so sanguine. It has been in contraction, and contracted a further -0.1 to 47.9. The three month average declined -1.3 to 47.0. Since manufacturing employment also was in contraction, although “less bad,” at 48.3, the weighted average declined -1.2 to 47.3:

This is the second month in a row that the weighted employment average has indicated contraction, and is close to its low levels of last summer, during which the jobs reports aaveraged no growth at all. By contrast, although I won’t bother with a graph, this morning’s ADP report suggested an increase of 125,000 jobs in May.

Finally, inflationary pressures in services picked up further in May, as prices paid rose 0.6 to 71.3. The three month average rose 2.8 to 70.9. The economically weighted average rose 3.3 to 73.6:

This means that almost 50% more business were raising rather than lowering prices across the broad economy. Note that the above graph, unlike the first three, goes back five years to show that the current situation is almost as bad as the worst of the post-pandemic inflationary spike.

Since gas prices at the pump rose somewhat less on average in May than in March and April, an issue might be whether consumer inflation would abate. The combined ISM reports suggest it will not. In which regard, interestingly the Cleveland Fed’s consumer inflation estimate for May currently rounds to 0.5%.

So the situation with services in May remained economically expansionary, but not for jobs, and with lots of inflation - a virtually identical situation that we saw for manufacturing in the ISM report for that sector two days ago.

April JOLTS report confirms a low-hire, low-fire, and low-quits economy

 

 - by New Deal democrat

The JOLTS report is low on my list of useful tools, but it does break down the labor market further than the jobs report, and it does have several slightly leading components, so let’s take a look at the latest report, which is for April.

Below are job openings (blue), hires (red), and quits (gold) through April, all normed to 100 as of the onset of the pandemic:

Job openings seem to get the lion’s share of attention from most commentators, but I treat them as somewhat fictional, because there are legions of permanent or fictitious job vacancy ads. That being said, they rose sharply, by 731,000 to a nearly two year high of 7.618 million - which mind you follows March’s second lowest number since the pandemic. On the other hand, hires declined -419,000 to 5.116 million, their 3rd lowest reading since the pandemic; and quits also declined, by -183,000, to 2.977 million, their *lowest* reading since the pandemic.  

Layoffs and discharges, which had rebounded sharply from their lowest numbers of 2025 in March, took it all back in April, declining -192,000 to 1.692 million:

This is consistent with the extremely low level of new jobless claims (red, right scale) (which are both more timely and much less noisy) we have seen since November, including a new 50+ year low at the end of April.

Finally, the quits rate (blue) tends to lead the YoY gain in hourly nonsupervisory wages (red). Here is the post-pandemic close-up of the last four years:

The quits rate has alternated between 1.9% and 2.0% for the past nine months. This counts as suggests that YoY wage growth is likely to continue to be stabile in the 3.5%-3.8% range for the next several months. But keep in that wage growth is a lagging indicator, which typically does not abate until a recession is already at hand.

In short, I would ignore the job openings number. As of April, this has remained a low-hire, low-fire, and low-quits economy.

Manufacturing expands in May; April construction expands nominally, but only data center construction in real terms

 

 - by New Deal democrat

May data started out as usual with the ISM manufacturing index. Plus, as a bonus, official government data is finally back on schedule, only 7 months after the end of the shutdown! By which I mean to say, April construction spending was also released, on time.

To cut to the chase, the news about manufacturing was both good and bad, while that on construction was ‘meh.’

Let’s start with manufacturing first. Late last year, I began to notice that the headline regional Fed and ISM numbers were trending “less bad,” and then finally outright positive. That trend continued this month, as the headline ISM manufacturing  number (blue in the graph below) increased 1.3 to 54.0 (recall that any number above 50.0 indicates expansion). The more leading new orders subindex (gray) also rose, by 2.7, to 56.8 suggesting the AI data center related Boom will continue. The three month averages, which smooth out a little volatility, rose 2.2 to 54.8 and 0.2 to 54.7, respectively:

As I have said a number of times recently, I am convinced that all of the activity surrounding AI data center construction and operation, and the affluent consumer spending secondary to the (narrow) stock market Boom associated with it are the only things keeping the US economy from being in recession at present.

That was the good news. As with last month, here’s the bad news. First, the contraction in goods producing employment continued, although it was “less bad” at 48.6 vs. 46.4 in March. The three month average is 48.3, also “less bad” than for all of last year:

This, by the way, is at variance with the official employment report as to goods-producing employment, which has been generally increasing since last October, and specificially, manufacturing employment, which has been increasing since last December. The most likely way for the two numbers to be consistent, since the ISM report is a diffusion index,  is if the gains in employment are narrowly focused, but stronger than a more diffuse weakening.

But the worst news is that there continue to be widespread increases in prices paid. This did decline in April, by -2.5, but the decline was to “only” 82.1. The three month average is 81.7. The graph I show below goes back five year to show that price increases are as widespread now as they were during the worst of the post-pandemic inflation:

As I indicated last month, this is a very sharp inflationary pulse, which is going to pass right through into consumer prices for goods.

Now let’s turn to the second report, for construction spending. 

in the past I have used construction to help track the long leading sector of housing; and in the wake of the Inflation Reduction Act, plus “Liberation Day,” it has also been useful to track manufacturing. But now, via tracking construction of water supply and power, it is also a useful proxy for construction of AI data centers.

In April on a nominal basis total construction spending rose 0.4%, but that was neutered by a -0.4% reduction in March. On a YoY basis, it was up only 0.7%. Residential construction spending rose 0.8%, and up 1.7% YoY. On a longer basis going back several years spending has been generally flat:

The problem with this nominally positive news is that the prices of construction materials rose 1.3% in April alone, and are up 6.7% YoY, meaning that in real terms both headline and residential construction spending was negative; in fact, the worst in nearly three years:

On the other hand, even nominally manufacturing construction continued its slide, down -1.2% for the month and -18.5% YoY (so much for tariffs bringing manufacturing back onshore!):

Finally, as indicated above, spending on power and water supply construction appear to be the best proxies for AI data center related spending. In April, power supply spending rose 0.6%, and it is up 6.8% YoY; while spending on water supply construction declined -0.5%, and is up 4.8% YoY - but is down 5% from its peak last October. Note that in the graph below I norm both to 100 as of the start of the pandemic, to show that power generation construction has increased nearly 40%, and water supply construction spending at its peak had almost doubled:

Although I won’t show the graph, adjusted by inflation in construction materials, only power supply construction spending is higher YoY.

Let’s put this all together. In the long leading sector of housing, spending is higher, but appears really to be related to the cost of materials. In the short leading sector of manufacturing, business is increasing, but spending on new manufacturing plants has been plummeting. The one sector of construction that appears to be truly increasing is power supply construction for AI data centers. And the strong inflationary pulse is continuing.

Weekly Indicators for May 25 - 29 at Seeking Alpha

 

 - by New Deal democrat

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

The split between the portion of the economy being driven by AI-related production and profits and the broad consumer economy continues to stand out starkly. But as I have pointed out often in the past many months, there is no sign as of yet that the consumer is putting down their credit card and pulling in their horns.

As usual, clicking over and reading will bring you up to the virtual moment as to the broad state of the economy, and reward me a little bit for collecting and organizing all of the data for you.

April new home sales: prices somnolent, an interesting wrinkle in inventory

 

 - by New Deal democrat

The final note from yesterday’s data is concerning new home sales, and more importantly at the moment, prices.

As a general refresher, new home sales are perhaps the most leading of all housing data; but they are very volatile and heavily revised, which is why I pay more attention to single family permits. But averaged over three months, most of the noise goes away.

Normally I start with the sales numbers, but at present I am most interested in what is happening with house prices. The data for new homes is not seasonally adjusted, so the better metric is the YoY% change. On a YoY basis, those were up 2.2% through April (orange) (absolute prices shown in blue, right scale):

The three month moving average remained negative (quarterly average shown in red), at -1.3%, well within the range over the past three years. Indeed, from the same three month period three years ago, prices are down -4.9%.

Compare this with existing home sales, where the median price through April was up 0.9%, and the Case Shiller and FHFA repeat home sales prices, which were up 0.7% and 1.7%, respectively. 

The difference is that home builders can change, and have changed, price points, not just by lowering profit margins, but also by building more densely, or smaller square footages, or fewer amenities.

So the bottom line is that all of the measures of median home prices that we have indicate that house price inflation is somnolent.

Now let me turn to sales, which are seasonally adjusted. These declined -41,000 to 622,000 annualized. All four month so far this year have shown sales at or near the bottom of their range for the past three years. This is a negative long leading indicator, but one that I will need to see validated by single family permits (red) in the next several months:

Perhaps more importantly at present, as opposed to new single family homes *sold*, the inventory of new single family homes *for sale* is typically one of the last shoes to drop before a recession actually begins. In April, inventory increased 8.000 to 489,000. After decreasing since last March, Inventory (red in the graph below) has been increasing so far this year:

This is probably because, until the Iran war, mortgage rates were decreasing and builders expected there to be more demand for spec houses. Since mortgage rates have since increased, builders were probably caught somewhat flatfooted.

The only other time such a turnaround happened was during the tech boom of the 1990s. After declining into 1998, housing inventory increased again until early 2000. Then it decreased again in the next year until the recession:

Not exactly the same scenario, but it suggests that a recession will not be signaled by this metric until iinventory turns down again.

The producer part of the economy is doing just fine, thank you

 

 - by New Deal democrat

Per my comments yesterday, so much data was released (with none coming today) that I did not report on several of the items. I’ll get to new home sales later, but first let’s talk about new orders and revised GDP.

The central theme of yesterday’s personal income and spending report was that real incomes have fallen significantly since last September, such that typically by now we would be in a consumer-led recession. That hasn’t happened (yet!) in part because consumers are digging into their savings and running up credit card debt to deal with the shortfall. The other part is because the producer part of the economy is booming (or bubbling) on the back of massive AI-related spending.

So let me start with my last graph from yesterday, of real manufacturing and trade sales through March, which declined -0.3% from their all time high in February:

After a post-tariff pause last year, real sales have resumed their strong upward trend this year.

And there is every sign that the trend is going to continue at least for a few more months, because the short leading indicator of durable goods new orders increased a whopping 7.9% in April alone, and the second biggest monthly gain since the pandemic, to a new all-time high. Although core capital goods orders did decline-0.8% for the month, it was only eclipsed by March’s all time high as well:

And beyond that, yesterday’s second report on Q1 GDP included corporate profits, a long leading indicator. Excluding inventories and capital consumption, real inflation adjusted profits increased 3.3% in Q1, although including those adjustments they declined -0.4%:

But on a YoY basis, either way they were higher by over 10%:

Typically real corporate profits peak one year or more before a recession. 

In summary, if consumers are teetering on the cusp of a recessonary contraction, producers are doing just fine, thank you.  For now, anyway.