Monday, April 4, 2022

Manufacturing positive, but no longer red hot; inflation-adjusted construction spending is flat


 - by New Deal democrat

[Programming note: I’ll discuss some of the innards of the March jobs report in further detail in the next day or two, as well as update the Coronavirus dashboard, with particular emphasis on the likely trajectory of BA.2. Since most States don’t bother any more to report on the weekends, there’s no point in doing that today.]

In addition to the jobs report, Friday gave us updates on manufacturing and construction.

The ISM manufacturing index, and especially its new orders subindex, is an important short leading indicator for the production sector. While the index remained positive, its more leading new orders component stumbled.

In March the index declined from 58.6 to 57.1, and the new orders subindex declined from 61.7 to 53.8, the lowest since 2020. Since the breakeven point between expansion and contraction is 50, these remain positive, (note the graph below does not contain the latest numbers):

This forecasts a continued expansion on the production side of the economy through summer.

Meanwhile, construction spending for February rose 0.5% in nominal terms for overall spending including all types of construction, while the leading residential sector also rose 1.1%, both thus making new highs:

Adjusting for price changes in construction materials, which for the first time in six months actually declined, by -1.2%, “real” construction spending rose 1.7% m/m - also the first increase since last August. In absolute terms, “real” construction spending has declined sharply - by -17.8% - since its peak in November 2020,  while “real” residential construction spending has declined -12.6% since its post-recession peak in January of last year:


While total construction spending has declined by more than the -10.4% it did before the Great Recession, the decline in residential construction spending, while increasingly substantial, remains nowhere near the -40.1% decline it suffered before the end of 2007.

There were some positive revisions to the past several months which helped out these comparisons this month, and reinforced that while down, they are not recessionary at this point. But with mortgage rates rising to nearly 5%, I would expect these metrics to deteriorate further later this year, after new home permits, starts, and sales.