- by New Deal democrat
As per usual, we start out the month with the ISM manufacturing report (for August) and the construction report (for July). Since these are two of the sectors that lead the economy, they give us a good first look at the remainder of the year.
And to cut to the chase, the first, while positive, was less so than in the past few months. The latter, for the second month in a row, was outright recessionary.
Let’s start with the ISM manufacturing report. The headline number declined -1.0 to 54.6 (any number above 50 signifying expansion). For forecasting purposes, I average the last three months, which comes out to 54.5:
The more leading new orders subindex declined -3.0 to 53.7, and the three month average was 55.5:
Both the headline and new orders numbers indicate continued expansion, albeit at a lesser pace, while the three month averages remain very good. This means the expansion in this sector can be expected to continue at least a few more months.
The “less good” news didn’t stop there. Employment decelerated -1.6 to 51.2. The three month average also remained (slightly) in expansion at 51.2:
Finally, there was another negative month in the prices paid subindex, which was unchanged at 71.1, indicating very widespread price increases upstream. The three month average was 71.7, significantly below its worst levels from the last few months, but still very close to the post-pandemic inflationary peak:
In other words, the manufacturing rebound this year continues, but at a cooler pace. What *hasn’t* slowed down is the upward price pressures. Can you say “inflationary expansion”?
Keep in mind that for forecasting purposes, I weigh manufacturing at 25%, and the other 75% from the ISM services report, which will be updated Thursday.
But if manufacturing indicated a somewhat slower inflationary expansion, for the second month in a row the construction spending report was if anything recessionary. Total construction (blue in the graph below) declined -0.5% in July, and was down -3.8% YoY. The more leading residential construction sector (red) declined -1.1% for the month, and is down -7.3% YoY. Since the price of construction materials (not shown) rose 1.4% in July and was up 10.5% YoY, the declines in real terms were even steeper:
The dismal news continued in manufacturing construction spending as well, down -1.0% for the month and down -21.2% YoY and over 30% from its September 2024 peak:
Quite simply, all of the above are recessionary.
Even spending on AI data center related construction didn’t help that much. Here is an update on spending on power construction (blue, left scale) and water supply (orange, right scale), the two sectors most closely aligned with the AI data center Boom:
The former rose 0.5% for the month, and is up a strong 5.3% YoY at least nominally, while the latter, after declining in June, was unchanged in July, and is up only 0.2% YoY at this point. Keep in mind once again that these are nominal figures and don’t take into account the 10.5% increase in construction materials YoY. In other words, even the AI data center construction center may be flagging.
So, to recap: manufacturing continues to expand, but at a slightly attenuated pace, but with continued strong inflationary pressures; and construction outside of AI is recessionary. This makes the services report which will be released on Thursday all the more important.
