KEY DATA: ISM (Manufacturing): -0.4 points; Orders: -2.7 points; Employment: +0.8 points/ Construction: -0.8%; Private: -0.7%; Residential: -0.6%

IN A NUTSHELL:  “The manufacturing slowdown continues and it is being mirrored by moderating construction activity.”

WHAT IT MEANS:  The trade battles are supposed to create a more level playing field for manufacturers and lead to a faster growing sector, but for now, the opposite is occurring.  Manufacturing activity continues to fade.  The Institute for Supply Management’s Manufacturing index eased again in June, dropping to its lowest level since October 2016.  That is not to say the sector is not expanding, it is, but the pace has decelerated fairly consistently over the past year.  In June, the decline was led by faltering orders, which were flat.  This was the first time in nearly 3½ years that demand was not expanding.  With output increasing faster, order books continued to shrink, which is not good news for future production.  There was one good number in the report: Employment expanded faster.  Manufacturing payrolls may not restrain job gains in Friday’s June employment report, though I still think we could see a negative manufacturing number.

Construction, the other major non-service sector, also looks to be weakening.  Activity dropped in May as both public and private sector and the softness was pretty much across the board.  Both residential and nonresidential spending were down.  Compared to May 2018 levels, private sector construction activity dropped over 6% as residential fell by double-digits.  Non-residential was off minimally.  MARKETS AND FED POLICY IMPLICATIONS:Now that we have cease-fire in the U.S./China trade war – which should have surprised approximately no one – it is time to focus on the economic fundamentals.  Well, maybe we shouldn’t.  There have not been a whole lot of good reports recently and today’s numbers continue to paint a picture of an economy continuing to moderate. Manufacturing has been battered by the trade war fears and the weekend’s news wasn’t particularly helpful.  The reality is that nothing changed other than the hope that additional tariffs will not be put in place in the near term.  The Chinese got what they wanted and the U.S. put off imposing tariffs that could drive the economy into recession.  I guess you can say that is good but future tariffs have not been ruled out and thus there really is no reason for anyone to feel that this situation is close to being resolved.  It was said that an agreement was 90% complete, which is downright scary.  Anyone who has been involved with major negotiations knows that the last few percentage points are the toughest ones and ten percent is a large number.  So, don’t expect an agreement anytime soon, which means that ultimately, the threats of new tariffs will likely rear their ugly heads.  As for the Fed, the focus is on Friday’s jobs report (yes, there is a jobs report on Friday!), which should be decent but hardly great.  I categorize 150,000-175,000 as decent.  Don’t be surprised if the unemployment ticks up.  Until we get that number, even with additional data being released before then, the best thing that can be said is that the economy is expanding, but at a more trend-like manner, which is somewhere in the 2% range.