- by New Deal democrat
Although manufacturing is of diminishing importance to the economy, (it was in deep contraction both in 2015-16 and again in 2022 without any recession), the ISM manufacturing index remains an important indicator with a 75+ year history of accurately describing that sector and forecasting it over the short term.
Any number below 50 indicates contraction. The ISM indicates that the number must be 42.5 or less to signal recession. I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.
The last few months may have an additional confounding factor in that after the Election, most businesses likely figured that the new Administration would be laying more tariffs, and may well have been in a rush to get their orders in ahead of time.
This probably figured into the fact that the ISM report for January was the strongest since the second half of 2022. And now in February the Index has fallen back. Specifically, the total index fell -0.6 to 50.3, and the more leading new orders subindex fell from its very strong January reading of 55.1 back into contraction at 48.6, the lowest reading in four months.
Here is a look at both the total index and new orders subindex since the Great Recession:
Including this month, here are the last six months of both the headline (left column) and new orders (right) numbers:
SEP 47.2. 46.1
OCT 46.5. 47.1
NOV 48.4. 50.4
DEC 49.2. 52.1
JAN 50.9 55.1
FEB 50.3 48.6
The current three month average for the total index is 50.3, and for the new orders subindex 51.9.
The surge and then retreat in new orders in particular certainly looks like front-running potential tariffs. The regional Fed manufacturing reports will take on added significance this month to see if they confirm whether that is the case.
For the economy as a whole, the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. Since the latter has been very positive in the past few months, the combined indexes have suggest continued growth in the months ahead. The non-manufacturing index will be reported on Wednesday.
Meanwhile, construction spending declined as well in the latest report, which was for January. Total spending fell -0.2% and residential spending fell -0.5%. Both of these have been close to flat in the past twelve months:
After declining slightly during the first nine months of 2024, the prices of construction materials have increased in the past few months:
Finally, the boom in manufacturing construction that followed the Inflation Reduction Act has also flattened:
Construction spending isn’t declining in any significant way, but it is no longer increasing either.
Together, this morning’s ISM and construction spending reports paint the picture of the goods producing sector of the economy that is not contracting, but is also no longer expanding.
