September Manufacturing Activity and August Construction Spending

KEY DATA: ISM (Manufacturing): -1.5 points: Orders: -3.3 points; Employment: +0.3 points/ Construction: +0.1%; Private: -0.5%; Public: +2.0%

IN A NUTSHELL: “While manufacturing keeps humming along, the construction sector is being kept afloat by government spending.”

WHAT IT MEANS: It may not be the best of times for manufacturers, but it is pretty close to that. The Institute for Supply Management’s manufacturing index declined in September, but you have to keep in mind that the August number was the highest in fourteen years. That is, the level remains really high. A second survey, the HIS Markit manufacturing index, was also up, providing further support for the view that the industrial sector is in great shape. Looking at the details, orders did grow more slowly, but once again, the level indicates the pace moderated from an unsustainably high rate. Hiring remained strong while pricing pressures, though still high, eased.

On the construction front, conditions continue to deteriorate, especially for private sector residential activity. Nonresidential construction was somewhat mixed, with office and health care building up but commercial up. What kept the overall sector from going into the red was government construction. New offices are being built like crazy as the public sector has changed its philosophy on spending.

MARKETS AND FED POLICY IMPLICATIONS: Today’s decent manufacturing data but disturbing construction numbers expose the yin and the yang of the economy. Manufacturing is holding up but the housing market is offsetting those gains. Residential investment likely restrained growth fairly significantly in the third quarter while the strong addition to growth coming from investment in structures looks like it faded. That is a disappointment given the business tax cuts. We get the first reading on third quarter growth on October 26th and it looks like it will be very good, but well below the second quarter’s 4.2% rate. As for investors, the easing of the trade tensions over the Nafta negotiations, which is now being called USMCA, for the United States-Mexico-Canada Agreement, undoubtedly will provide smiles. Whoever came up with that new name should be required to repeat the acronym one hundred times without pausing for air. There are some changes from current policy, with U.S. dairy farmers looking to benefit the most, which would make sense if the U.S. were moving back to an agrarian economy.   One of the biggest changes has to do with wages, which affects Mexico the most. It isn’t clear if the North American content increase for vehicles will greatly improve U.S. manufacturing activity. Regardless, the ratification process will likely fall to the next Congress and who knows what will it will look like. In this political and social environment, nothing will be done easily, so look for more fun and games when the process starts.