- by New Deal democrat
As usual, the month’s data begins with the ISM manufacturing index, and with a one month delay, construction spending.
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. As a refresher, any number below 50 means contraction.
In November both the total index and the more leading new orders subindex improved. The former rose 1.9 to 48.4, while the latter rose 3.3 into expansion at 50.4.
Including November, here are the last six months of both the headline (left column) and new orders (right) numbers:
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
NOV 48.4. 50.4
Here is what they look like graphically:
The three month average for the manufacturing index is 47.4, and for the new orders component 47.9. For the past two months, the average for the non-manufacturing headline has been 55.5 and the new orders component has been 58.4. These are very strong positive numbers. For the weighted ISM infexes to signal recession, the services component would have to swan dive to about 40 in both readings. Since that isn’t going to happen, we can safely conclude that the ISM indexes forecast continued expansion for the next few months.
Construction spending for October also came in generally positive. On a nominal basis, total construction spending rose 0.4% to a new record, and residential spending rose 1.5%, down -0.8% since May 2024. Only manufacturing construction bucked the trend, declining -0.1%, and is now down -0.9% from its June 2024 peak. Since the onset of the pandemic, total nominal construction spending is up 45.1%, residential up 53.7%, and manufacturing up 200.6% - this last due to incentivized re-shoring spending under the Inflation Reduction Act:
Since housing is such an important leading component of the economy, here is residential construction spending as above compared with the PPI for construction materials:
The prices of construction materials have been generally slowly declining for the past two years, meaning that real inflation-adjusted residential construction spending has risen to its highest level since January 2021, including a 0.4% increase in today’s reading:
The bottom line is that, while manufacturing remains weak, the economy continues to be powered along by (somewhat surprising) continued strength in construction, as well as the services sector.
