- by New Deal democrat
As I’ve previously noted a number of times, one of the more surprising developments in the past few months has been the resilience of manufacturing. After taking a beating following “Liberation Day” one year ago, companies adapted and resumed production if anything at an even more brisk pace.
That was apparent as recently as the preliminary data on new factory orders released this morning for February. While overall new orders for durable goods declined -1.4% for the month (blue, right scale), core capital goods orders rose 0.6% to a new post-pandemic record (red, left scale):
On a YoY basis, headline new orders were up 7.3%, while capital goods orders were up 5.1%, continuing the last six months’ trend of the best YoY growth since the beginning of 2023:
A similar, and more complex, story was told by the ISM manufacturing and services indexes for March. The headline number for services declined to 53.9, still a good showing (recall that any number above 50 indicates expansion), and for manufacturing came in at 52.7, the best number since the summer of 2022 (in the graphs below, the services number is in blue, the manufacturing number in gray):
And the more leading new orders subindexes showed even more strength, with services coming in at a very strong 60.6, the highest reading in three years, while manufacturing new orders declined to a still expansionary 53.5:
For forecasting purposes, I use the three month average of the series, with a 25% weighting to manufacturing and 75% to services. The weighted average of both the headline and new orders components are the strongest in three years.
If the present and leading conditions are without doubt positive, what about the stagflationary scenario?
Well, the prices paid components both came in sharply strong, with services at 78.2, and manufacturing even slightly higher at 78.3, both the highest since June 2022:
If both the goods producing and services providing sectors of the economy were being clobbered by inflation in March, the picture for employment was considerably weaker. While the “less bad” trend in manufacturing employment continued, with a slightly contractionary 48.7, still its second best reading in the past 12 months after January’s, the employment subindex in services declined sharply to 45.2, its worst reading since the pandemic except for December 2023:
This is somewhat foreboding for the official employment metrics for the next several months. According to Jill Coronado of the University of Texas at Austin, “the ISM non-manufacturing employment index, particularly the three month average has some significant predictive power.” Here is her accompanying graph:
The three month average of 49.1 isn’t as low as it was last summer, but nevertheless predicts slight contraction, particularly of services providing employment.
To summarize, on the bright side, left to their own devices the manufacturing and services data indicate not just continued expansion, but even more robust expansion. But it is a stagflationary expansion, with simultaneously moribund employment and widespread price increases.
And of course, neither have been left to their own devices. Even the March data only marginally reflects the impacts of the Iran war. Those are likely to show up much more drastically in the April and May reports. To put it another way, “Buckle your seatbelt, Dorothy, ‘cause Kansas is going bye-bye.”
