- by New Deal democrat
Last month the new orders components of the economically weighted ISM manufacturing and services indexes warranted the hoisting of a yellow flag “Recession Watch.”
This month that continued.
To recap, because manufacturing is much less important to the economy than in the decades before the Millennium, the economically weighted average of the ISM services index (75%) as well as manufacturing (25%), especially over a three month period, has been much more accurate since 2000.
Last week the ISM manufacturing index for June came in at 49.0, and its three month average was 48.7. The new orders subindex came in at 46.4, and its three month average was 47.1.
On Thursday the non-manufacturing index was reported at 54.2, and the new orders index at 51.3. The three month average for the headline index was 52.6, and for new orders 50.0.
Here is the manufacturing and services numbers for the past three years:
The economically weighted average for the month of June alone is 52.9, which is well into expansionary range. The average for the past three months is 51.6, which is still expansionary, but weakly so.
The new orders components of both indexes, however, are weaker:
The economically weighted average for June is 50.1, just barely into expansion. The three month average, however, is 49.3, up from 49.0 one month ago, but still contractionary.
Note that while we came close last summer, at no point did either of the three month economically weighted averages tip into contraction, because the services component was only negative for one month.
In summary, the three month economically weighted average of new orders for the economy as a whole contracted for the second month in a row in June. Thus the “recession watch” caution remains in place.
To reiterate my caveat from last month, treat the terms “watch” and “warning” the way you would for weather. A “watch” means that conditions are right, and the economy is at significantly heightened risk of a recession starting in the next few months. A “warning” would mean that a recession is likely, and almost imminently.
Last month I concluded this piece with the statement: “In the meantime, watch to see if the remaining short leading indicators to fall into place, most notably new jobless claims, consumer retail spending, employment in the goods-producing sectors, at very least a stalling in aggregate real payroll growth.” While some of those, notably new jobless claims and employment in goods-producing sectors, were positive last month; others - real retail spending, real spending on goods - did turn down, and aggregate real payrolls very likely have done so also, although we won’t know that for another week.
