- by New Deal democrat
Typically the new month begins with important manufacturing and construction reports; but this morning the construction spending report for August became the first casualty of the government shutdown.
The ISM manufacturing report has been a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium and China’s accession to regular trading status. While any number below 50 indicates contraction, the ISM itself indicates that the number must be under 42.8 to signal recession.
Because of the report’s diminished importance, 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. That briefly justified a “recession watch” during the summer, before the strong August rebound mainly in the services sector.
Today’s report continued the string of contractionary readings, although it rose slightly to 49.1. The more significant news is that the more leading new orders subindex, which rebounded to 51.4 in August, sank back into contraction at 48.9. Here is a look at both the total index (blue) and new orders subindex (gray) for the past three years (via Tradingeconomics.com):
Note that both remain slightly better than their low points in 2022-23, which is noteworthy because there was no recession then.
Hare the last six months of both the headline (left column) and new orders (right) numbers:
APR 48.7. 47.2
MAY 48.5. 47.6
JUN. 49.0. 46.4
JUL 48.0. 47.1
AUG 48.7. 51.4
SEP. 49.1. 48.9
The current three month average for the total index remains at 48.6, while the new orders rose slightly to a still contractionary 49.1. This is in accord with the recent regional Fed reports, which turned positive during August, but retreated somewhat in September.
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 51.0 and 53.2, respectively. Pending the ISM report on services next Monday, the economically weighted headline number is 50.4, and the new orders average is 52.2.
If the ISM services report next week does not indicate any further downturn, this means that the economy as a whole continues to expand, albeit just barely.
