- by New Deal democrat
As usual, we start out the month with reports on both manufacturing and construction. Ill post separately on construction. Additionally, the May JOLTS reports was posted, but I’ll discuss that tomorrow. So let’s start with the ISM manufacturing report, a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium (it was in deep contraction both in 2015-16 and again in 2022 without a recession occurring).
To recap briefly, any number below 50 indicates contraction. The ISM itself indicates that the number must be 42.5 or less to signal recession. For forecasting purposes, I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively. After both reports were posted one month ago, I indicated they justified a “recession watch.”
This morning’s report confirms that. While the headline number for June rose 0.5 to 49.0 (still contractionary), the more leading new orders subindex declined -1.2 to 46.4.
Here is a look at both the total index (gray) and new orders subindex (blue) for the past ten years:
Note that both remain better than they were in 2022-23.
Hare the last six months of both the headline (left column) and new orders (right) numbers:
JAN 50.9 55.1
FEB 50.3 48.6
MAR 49.0. 45.2
APR 48.7. 47.2
MAY 48.5. 47.6
JUN. 49.0. 46.4
The current three month average for the total index is 48.7, and for the new orders subindex 47.1.
As I indicated above, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the average of the last two months for the headline and new orders numbers has been 51.8 and 49.4, respectively. While the economically weighted headline number remains slightly above 50, at 50.4, the new orders average is 49.0.
In short, pending the release on Thursday of the ISM non-manufacturing report, for the second month in a row the new orders average is forecasting economic contraction in the next few month. Which means that, as of today, the “recession watch” forecast signal continues in place.
