Producer prices for July (apparently) show the first significant negative effects of Tariff-palooza!

 

 - by New Deal democrat

Normally I don’t pay too much attention to producer prices, but occasionally they are very important - and today is one of those days. 

Here’s why. In the past, as shown in this graph going back over 50 years:

when producer prices outstrip consumer prices, that means producers aren’t able to pass on the full amount of any price increases to consumers.

Put another way, corporate profits decline. Below is a graph of the last 10+ years, with the YoY changes in final demand producer prices and consumer prices averaged quarterly, vs. corporate profits (/2 for scale):

With a lag of several quarters, once producer prices outstrip consumer prices, the YoY gains in corporate profits decelerate and even outright decline. This shows up as weaker inputs in producer prices, and the cycle restarts.

Final demand producer price gains have been approximately equal to consumer price gains since last summer. If producer prices now spike even higher, we should expect that to show up in corporate profits within another quarter or two, and possibly even this quarter.

And when corporate profits turn down, they think about scaling back hiring, and even layoff off workers.

This morning suggested that such a spike in producer costs, probably engendered mainly by tariffs, but also by the weakened US$, has begun.

Raw commodity prices (dark blue in the graph below) increased 0.7% in July, while final demand producer prices (light blue) increased 0.9%, vs. 0.3% for consumer prices (red):

This is the second month in a row of such outsized gains, and the fourth time in the last seven months.

Meaning, on a YoY% basis, commodity prices are up 2.0%, while final demand prices are up 3.3%, vs. 2.7% for consumer prices:

And the relative surge in producer prices is showing up in both goods (red in the graph below) vs. services (blue):

The July increase in final goods prices was the highest since February of last year except for this past January, while that for services was the highest going all the way back to March 2022.

On a YoY basis, except for January the increase in goods prices is the highest in over two years, and services appear to be trending somewhat higher as well:

In summary, unless something changes in the tariff situation (unlikely), this is the beginning of a profit squeeze, and will likely negatively impact “real” consumer spending as well.

Initial and continuing claims continue to trend in opposite directions

 

 - by New Deal democrat

Obviously this morning’s PPI number was the most important report of the day. I want to get to that later, but first let’s update the jobless claims situation.

The good numbers in initial claims continued, as they declined -3,000 to 224,000. The four week moving average increased 750 to 221,750. But continuing claims continued elevated, down -15,000 to 1.953 million, still close to its 3.5+ year high:

On the YoY% basis more important for forecasting, initial claims were down -1.8%, and the four week average down -6.2%, while continuing claims were up 4.8%:

As per usual, this is not recessionary and indicates continued expansion.

Comparing initial, and initial + continuing claims with the unemployment rate YoY suggests that the latter should continue essentially unchanged from year ago levels in the coming month or two:

Since the unemployment rate last August through October was 4.1% and 4.2%, that suggests it will continue in that range in the next month or two.

Why are initial and continuing claims moving in opposite directions? As I discussed last week, there are two reasonable explanations. One is that there is some unresolved seasonality at work having to do with layoffs and rehiring in education. The other is that the recent deportation jihad against Latino immigrants means they are not showing up for work, or making jobless claims, meaning that employers are hanging on to their remaining workers more tightly even if their work orders are slackening.

Shelter, tariffs, and “just-so” inflation indexes

 

 - by New Deal democrat

In my note yesterday about the July CPI, I noted the transition from the trend where overall inflation ex-shelter was low, and shelter was high but disinflating, to a trend where inflation ex-shelter while still low was increasing, as shelter contributed the most to disinflation. The question was, and will be going forward, how much are tariffs contributing to inflation?

In the past 24 hours I’ve seen a number of “just-so” indexes; basically, if you exclude things that aren’t going up (e.g., gas and new cars), everything else is going up! Well, duh! So I am unconvinced by those analyses.

Let me start by re-upping two of my graphs from yesterday. First, headline inflation vs. core vs. all items less shelter:

All items less shelter have been increasing at less than 2.5% for two full years. Since officially measured shelter costs have been decelerating all during that time:

the headline number has decelerated as well. But inflation ex-shelter seems to be trending higher in the past 9 months, meaning core inflation has already stopped decelerating.

So let’s divide up everything *except* shelter, which oddly enough is counted among the “services” sector of the CPI. The below graph shows the YoY% change in consumers costs of durable goods (gold), non-durable goods (red), and services excluding shelter (blue):

The cost of durable goods had actually been undergoing *deflation* during most of 2023 and 2024, but the trend has reversed higher. The inflation rate for services has also ticked up mildly in the past few months, while that for non-durable goods has been meandering around 1%. Below I show the monthly changes in the first two since the beginning of 2023 better to show those trends. I excluded non-durable goods because that would just be a squiggle:

The uptrend in both durable goods and, since last summer, services excluding shelter is apparent.

Supposedly so far producers have only passed on a small portion of tariff costs to consumers, but that won’t last forever, so - IF inflation statistics remain reliable in the coming months - I expect those costs to start showing up particularly in goods prices.

The reliability of BLS statistics going forward is a real concern, given T—-p’s nomination of E. J. Antoni to become Chairman of the BLS. Last year he authored a paper arguing that the US had been in recession since 2022, using a “unique” measure of inflation that used the Housing Affordability Index instead of OER for the shelter component.

The Housing Affordability Index consists of two components: the change in house prices, as well as the change in mortgage rates. In terms of inflation, both of those components have uses. For example, no less than Barry Ritholtz of the Big Picture has argued that Fed rate hikes actually *increase* inflation but raising the costs of mortgages in particular. And I among others have argued that replacing OER with House Cost Indexes is a better model for consumer prices (bearing in mind that in any given month or year only a small fraction of consumers make a new house purchase). Further, I have argued that because house prices lead OER by 12-18 months, the Fed should use a “House price indexed CPI” in setting rates, since that tells them where inflation is likely to be in a year or so. 

But putting those two components together to measure inflation strikes me an another “just-so” compilation, designed to arrive at a desired conclusion, i.e, Biden’s Presidency featured a long recession.

And interestingly, Antoni’s analysis begins in the year 2019. I have learned that politically motivated economic analysis often makes use of cherry-picked start or end dates - and it turns out that this is exactly such a case.

Below is a graph of house prices as measured by the FHFA, together with the Fed funds rate over the past 10 years. Remember, it is the combined effect of these that makes up the Affordability Index. And lo and behold, look at what happened in 2017 and 2018:

House prices went up 15%, and mortgage rates increased about 15% as well, from 4.20% to 4.87%.

In other words, it appears that Antoni’s own analysis would also show a recession during the entire first 2 years of T—-p’s first term. Ooops!

The consumer inflation transition continues, as shelter prices decelerate further, and other sectors show some re-acceleration

 

 - by New Deal democrat

The story of this month’s CPI report is summed up in the first few graphs below: the shelter portion of the index continues its slow deceleration, while the non-shelter portion of the index appears to be in a slowly rising trend. This has resulted in headline inflation trending ever so slowly lower, while core inflation shows no deceleration at all.

First, here are the month over month numbers for headline inflation (blue), core inflation (red), and inflation ex-shelter (gold) for the past two years:

Note that I am no longer including the big inflationary spike of 2021-22. We all know about that, and we know that once gas declined from $5 to $3 a gallon in late 2022, as the supply chain un-kinked, inflation ex-shelter cooled rapidly. What the above graph shows is that since then, there have been fewer outright declines in prices ex-shelter, and bigger increases. Meanwhile there has been a slight trend of lower monthly increases in headline inflation, leading to roughly steady increases in core inflation.

Here is the YoY% look at the same data:

This is the graph that best tells the story: an apparent uptrend in non-shelter inflation, a slight deceleration in headline, and over the past 12 months flat YoY core inflation.

Looking at shelter specifically, we see once again that house prices lead by roughly 12-18 months. As YoY price advances in repeat home sales have waned again (and, per the experimental new and total tenant rent index I updated several weeks ago, new rents have gone sharply negative YoY, leading the total to continue its deceleration), shelter inflation has resumed its gradual deceleration:

On a monthly basis, both fictitious owners’ rent as well as actual tenants’ rent increased 0.3%, and YoY they advanced 4.1 and 3.5% respectively. These are the lowest YoY% increases since the beginning of 2022.

Underneath these big trends there are some other notable ripples in the pond.

Transportation services (mainly car repairs and insurance) lag the prices of new and used cars. The former have steadied for the past 2.5 years, while the latter decreased into last year, but have started to increase again, and are now up 30% compared to their pre-pandemic level:

Since used vehicles are something of a substitution good for new vehicles, this suggests renewed pressure on consumers - perhaps because of the interest rates on car loans, and perhaps also because of the pressure on their loans generally due to the sudden lapse of student loan payment abatements.

This has resulted in price increases of over 5% YoY for motor vehicle repairs and insurance, and in the past several months the pace has turned back up:

Looking at a couple of other problem children, recently price increases in medical care services have also re-accelerated, and did so again this month:

And prices for meat in particular are up almost 6% YoY, although inflation in the protein and dairy complex as a whole has cooled somewhat:

Finally, although I won’t use graphs, I did spend some time looking for specific impacts from tariffs. At first glance, so far they appear to be sporadic. Banana prices are up 4.3% YoY, and coffee prices up 14.5%.  Contrarily appliance prices declned -0.3% for the month, and are down -1.1% YoY.

Last month I wrote that consumer inflation was in a transitionary period. This continued to be the case in July, as shelter continues its disinflation, while other products and services have begun to re-accelerate in price. The widespread further increases in tariffs that were announced at the beginning of this month will only add to that acceleration over the coming months.

A decline in the immigrant labor force is not a valid reason for Wall Street’s optimism

 

 - by New Deal democrat



Despite some very soft employment and production data in the past several weeks, Wall Street has been on something of a tear, making repeated new all-time highs. Over the weekend I saw the following comment, which piqued my interest:

It certainly does seem that Wall Street is dismissing the news as inconsequential, and to be fair, Q2 earnings as of the most recent update have risen to all-time highs as well:

As a result, as I wrote on Seeking Alpha this past week, the “hard” monthly data and the high frequency data have diverged, the latter being heavily influence by a declining US$, a decline in new initial jobless claims, and the aforementioned stock market reaction.

We know that ICE is conducting daily raids rounding up undocumented workers (and also some lawful permanent residents and even a number of US citizens who unfortunately for them happen to be brown. And we know as a result in at least a few areas these workers have disappeared out of fear as a result. And according to the Federal Reserve Bank of Dallas, immigration to the US was down -82% in the first quarter of this year compared with Q4 of last year.

 

An abrupt decline in immigrant labor whether through formal deportations or simply ghosting employers out of fear could explain the decline in new jobless claims we have seen in the past month or so. Even if Los Illegales are not eligible to file such claims in certain states, employers might hold on to their native-born labor more tightly as a result.

But I am not sold on the idea of a downturn in immigrant labor as a reason to be sanguine about the recent soft employment report.

The “waning labor supply” argument is the reverse of the - as it turns out correct - argument in the past couple of years that the surge in immigration was behind the rising unemployment rate. Simply put, as an example if we start with an unemployment rate of 4%, the labor force then suddenly increased by 5%, and the number of new employees as a result increased 4%, the unemployment rate would go up: from 96% of the labor force employed to 100/105 of the labor force employed, meaning a 4.8% unemployment rate. 

Conversely, if the labor force suddenly goes down 5%, and 4 out of those 5 were employed immigrants, then the unemployment rate would decrease to 3.2%.

But here is the catch: those immigrants who have either been deported, or else stopped showing up for work are *also* either newly cash-strapped, or else not consumers at all anymore. In other words, in the above scenario consumption *also* goes down. Which means sales and production go down as well. In short, there is a recession.

And if sales and production go down, then almost certainly corporate profits go down as well. 

So I am not sold at all on the “optimistic” Wall Street argument.

One final point to consider is that the labor force participation rate is something of a long lagging indicator. Typically it only goes down once the mass of potential employees understand that the jobs market has softened, and only goes up after a recession after they understand that the jobs market is worth entering. Here is the long term graph from the 1980s:

Messy, but the general trend is that growth in the labor force participation rate peaks *after* peak growth in employment. And currently, the prime age labor force participation rate is -0.6% lower than a year ago (hence my addition of 0.5% to the rate, so that it shows at the 0 line in the graph above.

And as you can see from the above graph, typically such YoY declines in the prime age LFPR for longer than several months only happen during or right after recessions.

Further, the LFPR has turned down for *both* the native and foreign born:

Unfortunately these data sets are not limited to the prime age group, so must be taken with an extra grain of salt. But the decline among the foreign born has only eclipsed that of the native born in the past several months, not enough to explain the decline that was already ongoing.

In short, the situation with the labor force is not a valid source of Wall Street’s optimism.

Weekly Indicators for August 4 - 8 at Seeking Alpha

 

 - by New Deal democrat

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

There is a strong divergence between the high frequency data, which is very positive, and the monthly data, which has caused me to go on “recession watch.” Needless to say, this is very unusual, suggesting there may be some special factors at work; for example, the particular weakness of the US$ affecting commodity prices, or widespread deportation of immigrants affecting jobless claims. But it is impossible for me to tell at the moment.

Despite the lack of accord, clicking over a nd reading will bring you up to the virtual moment as to what that high frequency data is suggesting, and reward me a little bit for the effort I put in to organizing the ata for you.

Applying Prof. Edward Leamer’s pre-recession progression paradigm to the present

 

 - by New Deal democrat

Twenty years ago Prof. Edward Leamer gave an important speech at the Fed’s Jackson Hole, WY, retreat called “Housing IS the Business Cycle.” In that speech he discussed the fact that, historically, private residential construction as a share of GDP on average peaked 7 quarters before the onset of recessions, followed by motor vehicle and other durable goods sales, followed by consumer durable sales, and then the coincident indicators of recessions.

Let’s take a look at what that progression looks like at the moment.

First, here is Leamer’s noted measure of housing as of Q2’s GDP, both in nominal (blue) and real (red) terms:

In real terms, housing as a share of GDP peaked in Q1 2021. Nominally it peaked one year later, in Q1 2022. After stabilizing for awhile, both measures had secondary peaks in Q1 2024. The present readings are the lowest since before the pandemic.

My preferred way of looking at housing is the historical progression of peaks during expansions: first, single family permits, then housing units under construction, and then employment in residential construction and new housing units for sale. Here’s what that looks like currently:

Single family permits peaked in 2021. Units under construction did not peak until October 2022. Residential construction employment probably peaked in March, although it is only down -0.2% since then. And new homes for sale have not turned down yet. 

Next in Leamer’s line of progression are durable goods, starting with vehicles. Here is the most recent data for heavy truck sales (red) and light motor vehicles (blue):

In past cycles, heavy truck sales have declined earlier and far more unambiguously than car sales. The same appears to be the case at present, as heavy truck sales peaked two years ago and have declined more than -10%, a typical pre-recession decline. Car and light truck sales actually increased in late 2024, and even moreso with the front-running of tariffs earlier this year.

Looking at the broader durable goods picture, manufacturers’ new orders for durable goods increased in 2024 and have trended generally flat so far this year. Real purchases of durable goods appear to have trended similarly, although it is more ambiguous given the big jump last December and slump in January, which may just reflected unresolved seasonality:

Finally, manufacturers’ new orders for non-durable consumer goods has trended generally sideways for almost two years, while real spending on non-durable goods has continued to trend higher, albeit at a very attenuated pace since March of this year:

Putting it all together, housing is clearly down, even counting from its secondary peak 18 months ago, suggesting a likely time for recession by roughly the end of this year. Heavy truck sales are also down enough to signal a recession is near, although the signal from light vehicles is unclear to say the least. Broader durable goods orders and sales may have been in the process of peaking in the first half of this year; but consumer goods orders and sales are still trending higher.

Among the signs I am looking for to determine if my current “recession watch” should turn into a “warning” is more definite evidence that durable goods orders and purchases have turned down, and that consumer goods orders and purchases are at least trending more sideways.

The contradictory signs from initial and continuing jobless claims: what do they mean?

 

 - by New Deal democrat

As I wrote earlier this week, the positive trend in initial jobless claims is one of the most important data points indicating there is no imminent threat of recession. That continues, but what is increasingly disconcerting is the completely contrary signal from continuing claims.

Let’s deal with the weekly numbers first. Initial claims rose 7,000 to 226,000, while the four week average declined -500 to 220,750. Continuing claims, with the typical one week delay, rose 23,000 to 1.974 million, their highest level since mid-November 2021:

As per usual, the YoY% change is more important for forecasting purposes, and so measured, initial claims were lower by -3.4%, and the four week average down -7.8%, while continuing claims were higher by 5.2%:

Since initial claims have historically led the direction of the unemployment rate, here is the update on that metric, plus initial+continued claims, which are more coincident:

Initial claims suggest if anything downward pressure on the unemployment rate in the next several months, while the aggregate initial+continued claims suggest upward pressure in the next jobs report.

There have been other periods in the past 60 years when initial claims improved, but continuing claims remained elevated. To best show this, the below graphs divide the pre-pandemic historical record into two; first, 1966-1992:

And 1993-2019:

The first thing to notice is that initial claims have always led continuing claims, which is why I have paid more attention to them. Second, there have been four extended periods — 1984-85, 1995-96, 2002-03, and 2006-07 — where both measures of jobless claims were substantially higher YoY without a recession occurring. In two of those cases — 1985-86 and 1999 — continuing claims lingered higher for many months after initial claims turned down YoY.

But in no case have initial claims, measured monthly, remained more than 12% higher YoY for at least two full months without a recession occurring. And, to reiterate what I’ve said above, initial claims always led. 

It is possible that we are seeing some of the same seasonal variation this summer which gave rise to the massive downward revisions to the May and June employment reports. If so, this is likely to reverse itself within the next few weeks as the school year gets started. But in the meantime, the positive signal from initial claims remains one of the two most potent signs (the other being stock prices) that are contra to a danger of near term recession.

Dismal scenes from the July employment report

 

 - by New Deal democrat

We’ve settled back in to our typical post-employment week lack of new data, so today is a good day to update the leading indicators from the employment report, especially in view of their important contribution to why I went on “recession watch” yesterday.

As you probably already know, because I harp on it all the time, service sector spending frequently powers right through recessions. It is a downturn in the broad goods-producing sector which is a leading indicator.

In the past few months, there have been a few signs that goods-producing jobs were topping, but they were ambiguous. With the revisions last Friday that ambiguity seems to have been resolved. Below is a graph of employment in manufacturing (gold), total construction (red), residential building construction (orange) and goods-producing as a whole (blue), all normed to 100 as of April with the exception of residential construction, which peaked in March:

Only total construction jobs (including lagging sectors like nonresidential construction) have not turned down, with a 0.1% increase in the past three months. Manufacturing employment and residential construction employment are both down -0.3%. Goods-producing employment as a whole is down -0.2%.

Another leading indicator in the jobs report is the number of short-term unemployed. These are people who have been unemployed less than 5 weeks. This metric is somewhat noisy, but generally accords with initial jobless claims. 

Here is the historical record from 1990 until the Great Recession (unsurprisingly the series did not turn up before the pandemic, which is why I have not included the 2010’s):

Note that while there is considerable month to month noise, on a quarterly basis the signal comes through.

Here is the post-pandemic record:

With the exception of last autumn, there has been a significant uptrend in this metric.

Next let’s take an updated look at real aggregate nonsupervisory payrolls. Recall that this is an excellent “fundamental” indicator, tellling us how much average American working families in total have to spend in real terms. When that turns down, so does spending, and a recession almost always quickly follows. This has been stagnating this year:

Since March there has been only one new high, by 0.1%, in May. On Friday *nominal* aggregate pay was up 0.6%. We won’t have the “real” figure until next Tuesday’s CPI report, but even if CPI is relatively tame, it is unlikely real aggregate payrolls will be higher than May by more than 0.1%, for a 0.2% over four months - which would be a very lackluster increase.

Finally, the one leading indicator in the employment report which did not turn down was the average manufacturing workweek, which held steady at 41.0 hours:

This series has generally tracked with manufacturers’ new orders, which also declined into 2023, but then improved in 2024. This series has been generally steady for the past five months.

In yesterday’s post I noted that the three month averages of both the manufacturing and services surveys from the ISM showed a contraction in new orders for the last three months in a row. So it would not be a surprise if hours worked in manufacturing were to decline as well in coming months. Additionally, I’ve been pounding the fact that residential construction jobs turn down after the number of housing units under construction does — and that metric is currently down about -20%, so I see no reason why those jobs won’t continue to decline.

In other words, all of the leading metrics in the jobs reports that I have been waiting to turn down are presently either flat or have indeed turned down. Hence their contribution to the “recession watch.”

“Recession Watch” instituted for US economy, as economically weighted ISM indexes indicate present contraction

 

 - by New Deal democrat

Two months ago, in response to the new orders components of the economically weighted ISM manufacturing and services indexes, I hoisted a yellow flag “Recession Watch.” That continued last month as well.

This month the economically weighted headline numbers tipped into contraction as well. Together with other negative readings in the goods-producing sector of the economy and flagging if still positive services indicators, the yellow flag now transitions into a red flag “recession watch” for the economy as a whole.

Let’s start with this morning’s crucial report.

According to ISM, in July the services sector of the US economy grew at the lowest increment possible, just 0.1 over the balance point at 50.1. The more leading new orders component also grew just slightly at 50.3.

To recap, because manufacturing is much less important to the economy than in the decades before the Millennium, the economically weighted average of the ISM services index (75%) as well as manufacturing (25%), especially over a three month period (to cut down on noise), has been much more accurate since 2000. 

Starting with new orders, the previous two months came in at 51.3 and 46.4, giving us at three month average of 49.3. As I reported yesterday, the three month average for manufacturing new orders was 47.0. Here are what both look like [Note: all graphs from TradingEconomics.com. Blue is services, gray is manufacturing]:

The three month economically weighted average for new orders is 48.8, indicating contraction, just as it has for the previous two months.

The difference this month is that contraction has spread to the headline numbers as well. The previous two months for the service sector were 50.8 and 49.9, making the three month average 49.1. Yesteday the three month average for the manufacturing sector was 48.5. Here is that graph:

As a result, the economically weighted three month average for the headline indexes is 49.1. This has tipped the entirety of the indexes into not just leading but *present* contraction.

Before I conclude, what happened with the prices paid component is also noteworthy. The prices paid component clocked in at 69.9, a 2.5 year high, as is the three month average. As the below graph shows, the prices paid component of the manufacturing index has also made 3 year highs, although it backed off in July:

In short, what the ISM manufacturing and services indexes together tell us is that we have accelerating inflation, manufacturing contraction, and services just treading water. Or, in other words, stagflation.

Two months ago I concluded with the statement: “In the meantime, watch to see if the remaining short leading indicators to fall into place, most notably new jobless claims, consumer retail spending, employment in the goods-producing sectors, at very least a stalling in aggregate real payroll growth.” With the exception of new jobless claims, all of these have either stalled or contracted.

As I’ve said in the past two months, treat the terms “watch” and “warning” the way you would for weather. A “watch” means that conditions are right, and the economy is at significantly heightened risk of a recession starting in the next few months. A “warning” would mean that a recession is likely, and almost imminently. A “recession watch” for the US economy is now amply justified. Almost the only reason for not upgrading to a “warning” already is the below graph:

With rare exception, before a recession begins stock prices peak and turn down, while initial jobless claims turn up by 10% or more YoY. In addition to the above, I really think we need one more month of data to see if the recent downturn in real consumer spending is just payback for the previous front-running of tariffs, or whether it is a more durable trend. 

But to reiterate, consider this the initiation of a “Recession Watch” for the US economy as a whole.

“Recession watch” for economically weighted ISM indexes, and residential construction spending, continues

 

 - by New Deal democrat



Since Friday featured the very salient jobs report - and its immediate fallout - I delayed reporting on two other important reports that typically start the month - the ISM manufacturing index, and construction spending - until today. As it turns out, they only amplify the message from the employment report that starting in April - remember “Liberation Day”? - the goods producing part of the economy turned down. 

Let me start with the ISM manufacturing report, and repeat my typical opening summary. This metric has been 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). Any number below 50 indicates contraction. The ISM itself indicates that the number must be 42.5 or less 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. Two months ago, and again last month, that average justified a “recession watch.” 

Friday’s report continues the trend. The headline number for July declined -1.0 to 48.0, while the more leading new orders subindex rose 0.7 to 47.1. Here is a look at both the total index (blue) and new orders subindex (god) for the past fifteen years (via Briefing.com):

Note that both remain slightly better than their low points in 2022-23.

Hare the last six months of both the headline (left column) and new orders (right) numbers:

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

JUL 48.0.  47.1

The current three month average for the total index is 48.5, and for the new orders subindex 47.0.

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 50.4 and 48.8, respectively. Pending the ISM report on services tomorrow, the economically weighted headline number is 49.8, and the new orders average is 48.4.

In short, as of now for the third month in a row the new orders average is forecasting economic contraction in the next few months, and has now been joined by the headline index as well. Which means that, as of today, the “recession watch” forecast signal continues 

If anything, that “recession watch” is only amplified further by Friday’s report on June construction spending. 

For the month, total construction spending (blue in the graph below) declined -0.4%,  while residential construction spending (red) declined -0.7%. Nominally, total  residential construction spending has declined every month but one since last August, and is now down -3.6% from its May 2024 peak. Residential construction spending has declined every month but one in the past year, and is down -7.1% since May of last year:

Even though the cost of construction materials (gold) declined -1.6% in June, meaning that in “real” terms both measures rose last month, that has been the only decrease in costs this year, meaning their respective “real” declines from peak are -7.1% and -9.6%:

Two months ago I concluded by writing “Putting this report together with this morning’s other report on manufacturing from ISM, it appears the goods-producing part of the economy as a whole is very slightly contracting. It will be interesting to see if this is reflected in a decline in goods-producing jobs in Friday’s report.” Last month I reiterated that the goods-producing sector of the US economy was in a downturn.

The revisions in Friday’s jobs report only (here’s that phrase again) amplified that further, as goods-producing jobs have declined for three months in a row:

Which makes tomorrow’s ISM services report decisive, if it means the economically weighted average remains in contraction. In that regard, here’s the graph of the past three years of that index:

And here is the same time period for real consumer spending on services:

The two graphs broadly correlate, and since last Thursday’s real increase in services spending was one of the lowest during that period, I am not optimistic.

Bottom line: the “recession watch” continues.