ISM services index rebounds, indicating moderate expansion, but with stagflation

 

 - by New Deal democrat

With the shutdown of the official government sources, along with the regional Fed indexes, the ISM manufacturing and services indexes have become especially important. To recap, because of manufacturing’s diminished importance to the general economy, the services index has become significantly more important. For forecasting purposes, I assign a 75% weight to services, and a 25% weight to manufacturing, which is approximately their contribution to the total economy. Because there is some noise in the monthly numbers, I use the three month average of each.

On Monday, we saw that manufacturing continued to contract. The story was quite different in this morning’s services report, as the headline number increased to 52.4 (anything over 50 indicating expansion), while the more leading new orders subindex jumped from 50.4 to 56.2. As a result, the three month average of the headline number continued in modest expansion, at 51.5, while the new orders subindex rose to 54.2, a solidly expansionary reading.

Here is what the two headline numbers, for manufacturing and services, look like:

Since the three month average of the manufacturing index was 48.7, the economically weighted headline number rose to 50.8.

Next, here is the comparative look at the two new orders indexes:

Since the three month average of the manufacturing new orders subindex was 49.4, the economically weighted new orders number also rose to 53.0.

Because of the government shutdown, as I did Monday, I am paying more attention to the prices paid subindex as well. For services that rose to 70.0, the highest reading since the end of 2022, with the three month moving average being 69.5:

The manufacturing prices paid three month average was 58.0, so the economically weighted subindex stands at 66.6.

Finally, the employment numbers are also particularly significant now as well. In services as in manufacturing, these continued to indicate contraction, at 48.2. The three month average for services employment is 47.3:

Since the three month average for manufacturing was 46.0, the economically weighted employment reading is 47.0, indicating contraction.

Once again, the ISM monthly readings for services were in accord with the regional Fed reports. We see modest expansion - indeed a pickup of activity since the summer, and also a pickup in new orders, but a slight decline in employment, with rampant inflation - i.e. stagflation, but a stagflation which is currently still balanced towards expansion.

Since we won’t get a jobs report on Friday, I will offer a more detailed analysis of all the alternative measures of employment on Friday instead.

Tabulated initial and continuing state unemployment claims continue rangebound

 

 - by New Deal democrat

As I have done since the beginning of the government shutdown, the number of initial and continuing claims can be calculated notwithstanding, because it is based on reporting by the States, plus DC, Puerto Rico, and the Virgin Islands. Then by applying the same adjustment as was used for the same week last year, the seasonally adjusted number can also be estimated closely.

Further, since my forecasting method relies on the YoY% changes, it is almost never an affected by that seasonality. 

So tabulated, for the week ending October 25, unadjusted initial claims totaled 202986 vs. 201.447 in 2024, an increase of 0.9%.  

Last year this week the seasonal multiplier was *1.0822. Applying it gives us an estimated seasonally adjusted number of 220,000.

We can similarly calculate the four week moving average, since the last four weeks of claims were 228,000, 224,000, and 230,000, as well as this week’s 220,000. That gives us an average of 225,500, which is -10,750, or -4.5% lower than the number of 238,500 one year ago, which was the peak week for affects by the hurricanes which struck the Southeast, particularly Florida and North Carolina last autumn. These will end within two weeks.

Using the same methodology, unadjusted continuing claims for the week ending October 18 totaled 1,708,221 vs. 1,616,081 last year, an increase of 5.7%.

The seasonal adjustment for the applicable week last year was *1.14784. Applying it gives us an estimate of 1.961 million continuing claims, or 29,000 higher than one week ago. This is still within the range of continuing claims in the past few months, although very close to the high end of that range.

To give you a graphic idea of how this data shakes out, here are initial claims (blue), the four week average (red), and continuing claims (gold) all normed to 0 as of this week’s tabulation, compared with their readings in the past two years before the shutdown:

As with the past several weeks, absent hurricane distortions this continues the general neutral trend of initial and continuing claims, higher than one year ago but much less than 10% higher, forecasting a weakly expanding economy for the next several months.

ISM manufacturing confirms regional Feds’ reports: prices up, production improves slightly, employment contracting

 

 - by New Deal democrat



The ISM manufacturing and services reports assume heightened importance this month in view of the continuing federal government shutdown. These two, along with the regional Feds’ manufacturing and services reports, are our best sketch of the economy until the more thorough federal reports resume (hopefully?)

We already have the regional Feds’ reports, which as I concluded last week, showed a little rebound in manufacturing activity, but contraction in services. Prices paid increased at the most widespread clip since the major inflation of 2021-22. Prices received also increased, but not as much, meaning that only part (1/2 is a reasonable guess) of increased prices were passed on to consumers, which is a problem in and of itself. Finally, employment was essentially flat, neither growing nor contracting meaningfully.

With that in mind, let’s turn to today’s ISM manufacturing report. 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 this year’s string of contractionary readings, declining slightly to 48.7. The more significant news is that the more leading new orders subindex, which had rebounded to 51.4 in August, and then sank back into contraction at 48.9, gained slightly to 49.4. 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:

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

OCT  48.7. 49.4 

The current three month average for the total index is 48.8, while new orders improved to 49.9. As has been the case for awhile, this is in accord with the recent regional Fed reports, which as indicated above have shown some mild improvement in the manufacturing production picture.

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 52.5 and 53.2, respectively. Pending the ISM report on services on Wednesday, the economically weighted headline number is 51.1, and the new orders average is 52.2. These are weakly expansionary. 

Normally in the past I have not reported on prices paid or employment in these ISM indexes, but these are more important now. 

Prices paid (the ISM does not report on prices received downstream) decelerated from 61.9 last month to 58.0 this month, suggesting as with the regional Fed indexes that there is still widespread pricing pressure, but it is getting integrated into companies’ models. Here are both manufacturing (blue) and services (gray) prices from the ISM:

But the low point, as it has been all year in this index, is employment, which did improve, but from 45.3 to 46.0. Here is employment from both the manufacturing (blue) and services (gray) indexes:

In short, the ISM manufacturing report for October largely confirms what we saw with the averages of the regional Fed manufacturing reports: diffuse price increases, improving new orders, very slight improvement in production, and flat to moderately diffuse contracting employment.

The ISM services report was particularly strong in August. That won’t go out of the three month average for another month. But if the services report on Wednesday is contractionary, that would warrant at least a yellow flag caution that a recession may be close. Unfortunately all we have with this data, relatively speaking, is shadows on the wall, so I am reluctant to draw any stronger conclusion. 

Weekly Indicators for October 27 - 31 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

With the dearth of monthly federal economic data, the privately sourced data that forms the backbone of the high frequency indicators is even more important.

This week, unsurprisingly, the biggest move was in the yield curve, in response to the Federal Reserve cutting interest rates. But underneath, several coincident series, including the Weekly Economic Index and Federal Tax Withholding, softened to the very threshold of turning neutral from positive.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two for my efforts collecting and organizing it for you.

An appreciation of the Angry Bear blog

 

 - by New Deal democrat

Yesterday we were supposed to find out how much the economy grew (*if* it grew) during the 3rd Quarter, via the GDP report. This morning we were supposed to get the very important personal income and spending data for September as well. Neither of these were issued because of the federal government shutdown. While there are some decent substitute reports from other sources that can at least give us a back of the envelope estimate for this important data, they are no substitute for the real thing. We are flying blind, and there has been no urgency on the part of those in control of the Administration, the House, and the Senate, to do anything about it. In fact, if the economy is on the cusp of being in recession, they might prefer it that way.

It is an absolute disgrace that an alleged premier First World country has degenerated in to the governance of a Third World banana republic - and is poised to continue that way for possibly a long while more.

But today I want to pause to give a note of apprecitiaon.

For roughly the past 10 years, much of the material I have posted here has been picked up and cross-posted (with my permission) at the Angry Bear blog. For the past 5 years or so, *all* of my posts have been. Odds are that it gets more views over there than here.

The Angry Bear blog started over 20 years ago; in fact, Bill McBride a/k/a Calculated Risk started out there before he struck out on his own. For most of the time, it was hosted by Dan Crawford, until he passed away several years ago. One of his dying wishes was that the blog would continue, and he handed the reins over to another poster, whose first name in real life is Bill (not sure he would want his full last name posted publicly), who I had the pleasure of meeting over some gourmet pizza last year in Phoenix AZ.

For among other things health reasons Bill has also needed to step back. As a result, as of this weekend Angry Bear goes dark.

Angry Bear is only one of three economic sources I correspond with which have initiated plans to wrap up in the next year, mainly due to retirement. Sad, but as George Harrison sang, All Things Must Pass.

For my part, I am not a spring chicken either, but I have always figured there is another recession (not caused by the Giant Flaming Meteor of Death) out there, and another recovery. And I’ve also figured that, health permitting, I would like to keep at it until I forecast those cycle turns.

But I wanted to take this opportunity to express my appreciation to Bill, his late predecessor Dan Crawford, and everybody else associated with Angry Bear for their efforts. Thank you all.