Weekly Indicators for November 10 - 14 at Seeking Alpha

 

 - by New Deal democrat

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

The trends of strong retail spending, a weak US$, and strength in commodity prices all continue. But in recent weeks withholding tax payments have waned. While there can be a number of causes for that, it definitely merits a caution flag as to job creation.

As usual, clicking over and reading will bring you up to the virtual moment at to the state of the economy, and reward me with a little lunch money for my efforts in collecting and collating it for you.

The student loan shock

 

 - by New Deal democrat

Earlier this week, I wrote about 4 current shocks to the US economy (tariffs, medical insurance increases, SNAP payments, and AI related layoffs), but I should have included a 5th as well: the effect of the end of the student loan repayment moratorium.

As a quick refresher, the Biden Administration enacted a student loan payment moratorium during COVID. That moratorium ended at the end of September 2023. As a result, monthly student loan payments rose from about $1 Billion per month to as high as $7 Billion:

Unsurprisingly, the amount of student loans in serious delinquency rose sharply, from about 1% during the moratorium to almost 15% ( ! ) in Q3 of this year:

Since student loans cannot be discharge in bankruptcy, one coping strategy is to allow other types of loans, such as credit card debt and auto loans, to go into delinquency. And that is what we have seen happen ever since the moratorium was ended:

It’s unclear if this stressor has given rise to more bankruptcies or not. Via Bankruptcy Watch, here is the weekly YoY data as of last week:

Put this together with the other shocks I described earlier this week, and it is a wonder the US was not already in recession even before the government shutdown started. It resembles very much the “austerity” program that was tried in the UK and other European countries after the Great Recession, which retarded their recoveries to a great degree.

Finally, I should note that there has been at least one very deep recession in the past caused primarily by fiscal shock; namely, the recession of 1938, which was largely due to the abrupt ending of some New Deal stimulus programs. That recession was not fully ended until World War 2-related industrial production surged.

Light vehicle sales and transportation of goods: the next recession caution shoe may have dropped

 

  - by New Deal democrat

Although the temporary continuing resolution was signed last night, reopening the Federal government through January, needless to say the reporting of economic statistics has not yet resumed, meaning that this morning’s scheduled reports on consumer inflation and retail sales for October were not released. So we must continue to rely on private data to give us a sketch of the current economic situation.

One of the most important blind spots for data during the shutdown has been on durable goods production and purchasing. According to the paradigm discussed by Prof. Edward Leamer 20 years ago, the typical procession of a downturn begins with housing, then durable goods such as motor vehicles, then consumer goods spending, and finally the coincident production and employment sectors.

The housing sector has been recessionary, and worsening, for many months, as units under construction and real residential construction spending turned down sharply earlier this year. Another early warning sector, heavy truck sales, also turned recessionary in the past few months.

But what of the next shoe to drop - motor vehicles sales? For that we do have some insight via manufacturer and dealer reports of sales, and indirectly by motor vehicle shipments information.

Let’s begin with motor vehicle sales.  Here’s the historical look at heavy truck vs. light vehicle sales for the past 50 years (through August). Note that heavy truck sales typically turn down first, and turn down decisively months before the onset of recessions, vs. light vehicle sales, which are much more noisy and thus give a much more muddied signal:

While the official US DoT report for October was not released, via Bill McBride, Omdia (formerly reporting as Ward’s Auto) reported that in October light vehicle sales came in at 15.3 million units annualized, the lowest in 15 months:

Here is the close-up of the past five years, with light vehicle sales normalized by -15.3 million units so that October shows at the zero line:

Typically the three month moving average of light vehicle sales have had to decline about -10% YoY for a clear recession signal, and often that hasn’t occurred until the very cusp of the recession. For a clear signal now, we’d need to see monthly sales of 14.2 million vehicles annualized, so even though October’s number was among the lowest in the past three years, we aren’t there yet.

But even more recent weekly data from the AAR showing YoY transportation of motor vehicles released just this morning not only confirms the downturn, but suggests that it has intensified in the past few weeks:

In the last week, rail transport of motor vehicles and parts was down -9.4% YoY, and has been negative for the past four weeks. These are presumably vehicles being shipped to dealers, so this suggests that sales have continued to slump, and manufacturers’ shipments have been cut back.

If light vehicle sales have declined, suggesting at least a yellow caution signal from that sector, further data released just this morning suggests that the four economic shocks I outlined earlier this week (plus one I didn’t mention, the effect of the resumption of student loan repayments) are having a significant effect on sales in the wider goods producing sector.

First, here is this morning’s update on rail intermodal traffic from the AAR:

This includes motor vehicles as well as many other goods. Note that this too has declined YoY in recent weeks. As of this week, it was down -8.7% YoY.

This negative trend was reinforced this morning by the Cass Freight Report for October, which showed a -7.8% YoY decline in truck shipments:

Here is a longer term historical view of Cass Freight shipments together with rail intermodal traffic YoY. 

Typically it has taken a -10% decline in truck shipments to be consistent with an oncoming recession, together with a smaller decline, on the order of -5%, for rail intermodal traffic. 

Ordinarily I have a lot of cautions about relying too much on the Cass metric. It correlates well with manufacturing data, bust as we have seen several times in the past 10 years, a signficant downturn in manufacturing is not enough to warrant a recession call. Further, the Cass index tends to come in more negative than the official freight report, currently suspended, from the GoT.

But in the past few months the Cass Report has been sending a signficant negative signal.

I should point out that as of this week consumer retail spending continues to hold up well, up 5.9% YoY as of this week, as measured by Redbook:

In fact generally speaking it has improved since July, in consonance with the stock market’s gains fueling a wealth effect.

To reiterate what I wrote at the beginning of this post, alternate private data can only provide us with a sketch of the state of the economy. More thorough official data, in particular as to sales, income, production, and inflation, are absolutely necessary. But the private data we do have for the past month and a half warrants a yellow caution flag for sales of motor vehicles and other important durable and consumer goods.

In other words, the next shoe may have dropped.

Important thought for the day: lessons from SuperNanny

 

 - by New Deal democrat

From Avika M. Cohen, “Litigation Disaster tour guide”:

——-

Ppl need to understand what's happening here. The GOP response to the shutdown was: You're gonna cave, or we're going to hurt vulnerable people by shutting off SNAP. The Dems, unwilling to let that happen, caved. Having watched that, the GOP is now saying: "Give us what we want on abortion or we'll hurt people who need ACA subsidies.”

There is every reason to believe that the Dems will cave. And if they don't, Republicans will run on "we put up a bill to extend the subsidies, the Dems filibustered it because they want to kill babies, they own the expiration" Which will make vulnerable Dems even more likely to cave.

Thing is, when you teach a bully that they can get what they want by bullying, they don't just stop. They go back to that well over and over again.

There are certain fights that you need to either never pick in the first place or be certain you're willing to see all the way through. The shutdown was one of them.

How many clients have we had the "if you're going to do this you need to be willing to see it through, because here's what happens if you start it and then buckle, please factor that into your decision about whether you want to start" conversation with? We're lucky to have so many who get it.

https://bsky.app/profile/akivamcohen.bsky.social/post/3m5fev6mhpc22 

This was one of the constant lessons of SuperNanny. How often, following SuperNanny’s instructions, would the parents put a spoiled toddler to bed despite the child’s crying, and then after 15 or 20 minutes of continued shieking, mom (usually) couldn’t stand it any more, and run to the toddler’s bedroom door. Sometimes SuperNanny would have to physically intervene to talk them out of it, because it was the worst thing they could do.

The 4 shocks jolting the US economy towards recession

 

 - by New Deal democrat

This week the normal empty period for new data after the monthly jobs report is of course compounded by the government shutdown. There is no noteworthy new private data coming out until Thursday, so don’t be surprised if I play hooky tomorrow.

But today let me follow up on some macro analysis. 

A few months ago I pointed out that, going back 60 years, every US recession has been associated with a shock to the system. In other words, the normal progression of interest rates, building, sales, income, and jobs have caused waxing and waning in sectors of the economy, but haven’t by themselves been enough to cause it to contract. For that, you needed an economy that was vulnerable, and a shock administered to that vulnerable economy.

Sometimes it has been an oil shock (1974, 1979, 1991, and partly 2007). Sometimes it has been an interest rate shock (1969, 1974, 1979, 1981). Sometimes it has been a financial shock (2001, 2008). And of course in 2020, it was the Giant Flaming Meteor of Death a/k/a COVID. I don’t mean to suggest that these recessions have been monocausal, just that a shock to the system has always been a part of the equation.

Going into 2025, the US economy was certainly vulnerable. High interest rates had taken a toll on the housing market. Employment, especially in manufacturing, was waning. The post-COVID spike in vehicle prices, repairs, and insurance, was still making its way through the system.

But this year, at least 4 shocks have been administered to the system, some (likely) transitory, but some more chronic:

1. Tariffs

2. Medical cost increases.

3. The suspension of food stamp benefits.

4. AI-related layoffs.

Let’s briefly discuss each of these in turn.

1. Since “Liberation Day” at the beginning of April, almost $200 Billion in tariffs have been imposed, an increase of over $100 Billion since 2024. In Q3, this was roughly 3x the amount collected before this year, and 6x the amount collected just before the 1st T—-p Administration:

The evidence so far is that in the aggregate companies are bearing about half of the increased burden, and are passing on about half of the burden to customers. In October alone, $60 Billion in tariffs were collected. If customers paid half of that by way of price increases, that amounts to $50 for every man, woman, and child in the US. That may not be a significant burden for affluent households, but for lower income households it is going to have a real impact.

2. Medical cost increases. As part of the Big Bad Billionaire Bust-out Bill, Obamacare subsidies were ended. Since about 90% of all Obamacare enrollees make use of these subsidies, that means that 22 million people are directly affected:

These households are either going to have to pay (in some cases astronomical) increases for the cost of coverage, or drop medical coverage completely. If they pay, that is another shock to the household budget; if they don’t, it affects the coverage, and the profits of insurers and health care providers. The proposed ending of the government shutdown will make this effective immediately.

3. The suspension of food stamp benefits. As has been widely reported this month, about 44 million people in the US make use of food stamps:

To the extent meager household income has to be diverted to buy that food, needless to say it is not available for any other kind of consumption (including payment or rent or utilities). While the ending of the government shutdown should mean the resumption in payments, keep in mind that the proposed continuing resolution only lasts through January. In other words, in 75 days we are right back here, and the successful use of SNAP benefits as a fiscal weapon this time means it will surely be implemented again then.

4. Finally, as I noted on Friday, layoffs as counted by Challenger Gray were at their second highest monthly level since the COVID lockdowns, and the highest October level in a quarter of a century. Many of these were concentrated in tech companies, as live human beings were replaced (or, “replaced”) by AI algorithms:

While this hasn’t shown up in any appreciable increase in new jobless claims, as I noted yesterday the number of continuing claims is close to its highest level in over three years. If this continues, it seems very likely we’ll see it show up in an increase in initial claims as well.

So there you have it: four somewhat independent shocks to the US economic system that individually or collectively might be enough to push it over the edge into a recession. In that regard, let me re-post this graph of the likely combined impacts of tariffs and the Big Bad Billionaire Bust-out Bill on household incomes by percentile:

This only includes the first two of the 4 shocks described above.

Needless to say, the shutdown of official government economic data could hardly have come at a worse time. While we have reasonable proxies for the employment situation, alternative data for income, sales, and spending is spotty. In particular, how has spending on durable goods by companies and consumers held up during this period? Have they cut back, or have stock market gains and the wealth effect so generated more than overbalanced the above described shocks. We simply don’t know. Assuming government data releases resume shortly, I will be particularly focused on that information.

Tabulated state level jobless claims continue neutral trend

 

 - by New Deal democrat

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

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

So tabulated, for the week ending November 2, unadjusted initial claims totaled 216,238 vs. 212,743 in 2024, an increase of 1.6%.  

Last year this week the seasonal multiplier was *1.0388. Applying it gives us an estimated seasonally adjusted number of 225,000.

We can similarly calculate the four week moving average, since the last four weeks of claims were 224,000, 230,000, and 220,000, as well as this week’s 225,000. That gives us an average of 224,750, which is -2,000, or -0.9% lower than the number of 226,7500 one year ago. Of note, this is the last week in which the 2024 comparison will be affected by the hurricanes that temporarily depressed claims for several weeks in October. Excluding that week, the average of the three last weeks this year is slightly higher.

Using the same methodology, unadjusted continuing claims for the week ending October 25 totaled 1,711,947 vs. 1,646,920 last year, an increase of 3.9%.

The seasonal adjustment for the applicable week last year was *1.14152. Applying it gives us an estimate of 1.954 million continuing claims, or -7,000 lower than one week ago. Still, continuing claims during the government shutdown have all been close to their highest levels since 2021, which was 1.968 million this past July. 

For graphic comparison, 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.

Weekly Indicators for October 3 - 7 at Seeking Alpha

 

 - by New Deal democrat

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

This was the week that the 800 pound gorillas of Wall Street reported Q3 earnings, and - to use a World Series type metaphor - hit it out of the park. 

Meanwhile down in gruntland, the amount of goods being moved from ports to markets hit a major air pocket.

More signs of a “K shaped”, or bifurcated economy where Wall Street titans are doing well, fueling upper income spending, while down below there are signs of exhaustion.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy - with data almost entirely unaffected by the government shutdown - and reward me with a penny or two of lunch money for my efforts in collecting and organizing it for you.

October employment situation: stagnant hiring, increased firing, continued wage growth

 

 - by New Deal democrat

On a normal first Friday of the month, I would be crunching the official jobs report data to try to provide not just a coincident report on the jobs market, but also to focus on the leading indicators within that report, such as the manufacturing and construction sectors and also aggregate real payrolls. For the second month in a row, I can’t do that. But what I can do is aggregate some of the most reliable alternate sources for the state of the labor market; and fortunately, there is no big divergence among those: they all point to a stagnant but not meaningfully contracting jobs sector.

Let me start with the number of jobs, and then follow with alternatives to the unemployment rate. And further, let me start with the three best sources: the ISM reports, the regional Fed reports, and ADP.

To begin with, the ISM reports are diffusion indexes. They don’t report the number of gains or losses, but whether more firms than not are hiring vs. firing. Any number below 50 means more firms are letting people go than hiring them, and ss I reported Wednesday, ISM services showed slight contraction, at 48.2. The ISM manufacturing report had previously also shown contraction for October, at 46.0:

Since services account for about 75% of all jobs, the economically weighted number is 47.6 for the month. This would translate to a continued downturn in jobs in the goods producing sector, to a virtual standstill or even small losses in the service-providing sector as well.

The next source is the 5 regional Fed reports from NY, Philly, Richmond VA, Kansas City, and Dallas. These are also diffusion indexes, with the balance point at zero, so a positive number is expansion, a negative one contraction. As I reported last week, here are the numbers from the five manufacturing reports (1st line) and services reports (2nd line):

NY 6.2; Philly 4.6; Richmond -10; Kansas City 1; Dallas 2.0; AVERAGE 0.8

NY -5.2; Philly -0.5; Richmond 0; Kansas City -4; Dallas -5.8; AVERAGE -3.2

Unlike the ISM manufacturing report, the regional Fed reports show slight gains in the manuacturing employment sector; but like the ISM services report, significant contraction in the services employment sector.

Next, as has been widely reported, ADP indicated that 42,000 private sector jobs were added in October. As the below graph by Prof. Jason Furman shows, the average of the last three months is approximately 0:

Bank of America’s internal data also showed further deceleration over the past two months from the last officially reported numbers:

A gain of only 0.5% for the entire last 12 month period suggests no monthly growth at all in either September or October.

Finally, although I have no idea whether this new source is reliable or not, Revelio Labs reported that in October -9,100 jobs were lost:

Weakness was also shown in new job postings by Indeed, which declined further in October. Note that this source has closely matched the job openings data from the JOLTS series:

Another important metric in the monthly jobs report is wages. These are also covered by some of the regional Fed reports as well as ADP.

Here are the manufacturing (1st line) and services (2nd line) diffusion indexes from the regional Fed reports for October:

Manufacturing: NY n/a; Philly n/a; Richmond 15; Kansas City n/a; Dallas 14.2; AVERAGE 14.6

Services: NY 25.9; Philly 38.3; Richmond 17; Kansas City 21; Dallas 10.7; AVERAGE 22.6

The economically weighted average from both indexes is 16.5, indicating that wage increases continue at a strong pace.

ADP similarly reported continued strong wage growth, at 4.5% YoY for job stayers, and 6.7% for job switchers:

Finally, let’s take a look at unemployment measures.

As I often say, jobless claims lead the unemployment rate. Initial jobless claims are noisier but more leading; when combined with continued claims they carry more signal but lead only slightly. Here is what both measures looked like compared with the unemployment rate as of the last official reports:

Since the shutdown, initial claims have varied between 220,000 and 230,000, and on a four week moving average basis have been slightly lower than one year ago, while continuing claims have been in the 1.930 to 1.960 million range, close to the top of their readings in the past three years. This suggests that the unemployment rate would be no lower than, and likely slightly above its range from one year ago, which was 4.1%-4.2%:

This would put this month’s likely unemployment rate at between 4.2% to 4.4%.

Further, as was widely reported yesterday, Challenger Gray indicated that there were 153,000 job cuts in October, the highest for this month in several decades, and with one exception the highest since the pandemic lockdowns:

And Bank of America indicated that unemployment insurance checks directly deposited into its account, while slightly down from September, were 10% higher YoY - an even bigger YoY increase than official continuing claims:

To summarize, the best alternative jobs data we have for October are almost all in accord. There were roughly no job gains at all, +/- about 40,000. Meanwhile wages continued to grow at a relatively fast pace, in accord with the official data from earlier this year. And the unemployment rate was steady to slightly higher compared with earlier.

Long leading indicator Senior Loan Officer Survey for Q3 was neutral to slightly positive

 

 - by New Deal democrat

The Senior Loan Officer Survey is a long leading indicator, telling us about credit conditions that typically turn worse a year or more before the economy turns down, and improve just at the economy is ready to turn up. Fortunately, since it is reported by the Federal Reserve, it is unaffected by the government shutdown.

The one downside is that the information is only reported Quarterly, and with a one a one month lag. So the Q3 update was only reported on Tuesday.

There are two series that have a long enough record to give us a lot of information. The first is whether banks are tightening or loosening standards. Since tightening is shown as an increase, this is one of those series where higher means worse. 

Historically banks are still tightening, but less so as an expansion begins. As it progresses, they ease lending standards; but  become more cautious well in advance of an ensuing recession. In early 2024, the sharp decline in the percentage of banks that were tightening standards indicated an expansion that was well established.

Interestingly, although at no point during this expansion have banks on net eased, this year the relative progression of banks that moving in that direction has stalled:

This is a neutral reading. It does not look like what has historically happened closer in time to a recession; but on the other hand it does not indicate a strengthening expansion.

In the second series, confusingly, higher does mean better. And in Q3, each measure was slightly positive. Further, while the series are very noisy, there was an unmistakable improving trend in 2023-24, which may be plateauing this year:

In any event, the Q3 result indicates business confidence in expansionary plans.

The upshot is that this long leading credit indicator is presently neutral to slightly positive.

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.