KEY DATA: ISM (Manufacturing): -3.2 points; Orders: -8.7 points; Employment: +1.9 points/Construction: -0.3%; Private Residential: +0.9%
IN A NUTSHELL: “Manufacturing’s robust growth rate has slowed to only a strong pace.”
WHAT IT MEANS: I hope everyone had a wonderful New Year. The manufacturing sector surged in the fall and it was likely that the robust pace would moderate. Well, it did in December. The Institute for Supply Management’s Manufacturing index dropped fairly sharply, but that hardly signals the sector is in trouble. First of all, the level is still consistent with solid growth. Indeed, it is hard to believe that firms ramped up hiring if they were worried that conditions were weakening significantly. Thus, the moderation in order growth, including imports and exports, as well as production doesn’t seem to be viewed with much alarm.
Construction activity eased in November, but here too the details are not pointing to a major slowdown. Private sector construction rose, especially for residential projects. That was really good news since this segment had been one of the weaker links. Nonresidential construction was off. The big drop was in public sector power projects. That may be reflective of the falling energy costs, though given the long lead times on these activities, it is unclear exactly what is happening.
MARKETS AND FED POLICY IMPLICATIONS: The economy continued to expand nicely at the end of last year but we will have to wait until next Friday to see how many jobs were created and a few more weeks to find out fast GDP grew. The early signs are that consumers spent money like crazy and manufacturing during the entire quarter was strong. Most economists expect that we will come down sharply from the 5% mountain that we got to in the third quarter. It is hard to think we will be anywhere near that number in the fourth quarter. But I still believe that barring a huge reduction in inventories, growth could once again be near if not above the 3.5% pace we have seen for four of the last five quarters. That is well above consensus. Still, for investors to remain exuberant, we need the data to show that the economy is hitting on all cylinders. Today’s numbers don’t show that, though they also don’t indicate a major slowdown. As for the Fed, the next FOMC meeting is January 27, 28. The members will know the December employment numbers but I am unsure how much they will know about fourth quarter growth, which is scheduled to be released on January 30th. Regardless, the “considerable time” phrase is being replaced by patience and the members have to start indicating what that means. I guess we will find out then, maybe.
KEY DATA: ISM (Manufacturing): +1.9 points; Orders: +3.3 points; Employment: -0.1 point/ Construction: +1.8%; Private: +1.4%; Public: +3.0%
IN A NUTSHELL: “Manufacturing activity is soaring and construction is starting to boom, so why are people doubting that the economy is finally switching gears?”
WHAT IT MEANS: I hope everyone had a wonderful weekend but summer is unofficially over and it is time to get really serious about the economy. While some may think I am suffering from heat stroke, I really do think we are closing in on escape velocity. Manufacturing activity continued to accelerate in August, according to the Institute for Supply Management. The most eye-opening part of the report was another surge in new orders. We are talking about really strong order growth here. As a result, companies ramped up production, also to a high level. Despite the growing output, order books filled and that means production levels could continue expanding. About the only negative component of the report was the employment index. It eased a smidgeon. However, there is still a lot of hiring going on. Despite the problems in Europe, export orders grew, a sign of that U.S. firms finally get it when it comes to world trade.
We got another indication that construction will be adding to growth this quarter. Construction spending soared in July. The increases were spread across much of the economy. In the private sector, nonresidential activity jumped even more than residential. But for me, it was the pick up in public construction activity that was most noteworthy. Government has been the biggest roadblock to growth, restraining spending and hiring. That is clearly changing. We saw an increase in state and local government activity in the second quarter and hiring is starting to grow again. Now we see that governments are back in the building business and they are even investing in schools again. Amazing.
MARKETS AND FED POLICY IMPLICATIONS: It is the week that contains Employment Friday so anything that comes earlier tends to be downgraded. But the robust manufacturing report, one that was well above expectations, makes it clear that the economy is hitting on almost all cylinders. It also provides some substance to my expectation that we will get really strong numbers on Friday. My payroll increase is just north of 275,000 and we could see a gapping down of the unemployment rate to 6%. Neither are consensus numbers but that is my story and I am sticking to it. If my forecast does indeed happen, there could be some real screaming at the Fed. There are a number of very anxious inflation hawks out there waiting for the right time to show their talons. But right now, that is just conjecture. We still have three days before E-Day. As for investors, the improving economic environment should be good for sales. But it also may mean a sooner than expected rise in rates and growing pressure on wages. Which trend will rule is a good question and I am not sure anyone can answer that right now. We will have to wait and see.
KEY DATA: ISM (Manufacturing): down 0.1 point; Orders: up 2 points: Employment: flat/ Construction: up 0.1%
IN A NUTSHELL: “Manufacturing activity remains solid and the sharp rise in demand points to improvement going forward.”
WHAT IT MEANS: We know the economy went backwards sharply during the winter, but where are we now and where are we going? It looks like the economy is accelerating, but maybe not as rapidly as most of us had hoped. The Institute for Supply Management’s June measure of activity eased a touch but the May level was the highest in five months. In other words, the winter wipeout has been wiped out. On the positive side, new orders surged and that is good news for future production, which moderated. However, the level of the production index remained quite high, so we are not talking about any major retrenchment. Export demand continued to grow, but less robustly while imports accelerated. Despite the new orders growth, backlogs fell and that may be the reason that hiring didn’t pick up. We get the employment report on Thursday and it should be really good, but manufacturing may not be the prime driver of the gains.
In a separate report, construction activity increased less than expected in May as residential activity declined. The good news is that the government is back building infrastructure again as spending on roads, water and sewer projects, power and transportation needs were all up solidly.
MARKETS AND FED POLICY IMPLICATIONS: Last week we saw that consumer spending was nothing special in May and that has raised some questions about how strong growth was in the just completed second quarter. We know that households bought lots of motor vehicles. Indeed, it looks like the June numbers will be even better than projected. But spending on most other goods was moderate, at best. Disturbingly, demand for services, the largest component of demand, was up minimally. Maybe the warm June caused utility demand to jump, but right now, it is hard to see growth above the four percent growth pace I have been forecasting. But that doesn’t mean the economy is weak or soft or not accelerating. The manufacturing sector is not doing well because the rest of the world is growing rapidly. It is doing well because domestic demand is on the rise. So I still think it is possible that the second half of the year will see strong to robust growth, but until that happens, it will remain a hope. And the Fed is not operating on hopes and prayers. Chair Yellen may not be from Missouri but she seems to believe in the state’s nickname of “Show Me”. Until growth really does hit its stride, the Fed will be keeping rates low. As for investors, it’s the first day of the new quarter and they also seem to be willing to believe that rates will remain low and the markets can rise until they are shown that is not the case.