November Manufacturing Activity and October Construction Spending

KEY DATA:  ISM (Manufacturing): -1.8 points; Orders: -2.8 points; Employment: -4.8 points/ Construction: +1.3%; Private Nonresidential: -0.7%; Private Residential: +2.9%

IN A NUTSHELL: “The feared economic slowdown is starting, but it is pretty slow off the blocks.”

WHAT IT MEANS:  The transition from the recovery boom to the more sustainable growth pattern that we should start seeing in the first half of next year is underway.  It looks like the brakes are being applied somewhat gently.  The Institute for Supply Management’s manufacturing activity index faded in November, but it did not crater.  Indeed, the level of activity, while somewhat slower than we had been seeing, is still pretty solid.  Yes, new order growth did moderate, but there is still a ton of demand out there.  That is true for exports and imports as well.  With order books filling a little faster, there is little reason to expect that production will be cut back significantly anytime soon.  The one concern in the report was in employment.  For the third time in four months, payrolls were reduced.  We get the October payroll data on Friday and it will be interesting to see if manufacturing gains are much more modest than they have been.  I suspect that will be the case.

Construction spending jumped in October, but it was all in the residential portion of the economy.  Excluding housing, private building activity declined.  Over-the-year, private residential construction is up a robust 14.5%, which offset the over eight percent drop in nonresidential activity.  Outside of warehousing, which is likely to build out given the further move toward online spending, I suspect that firms will be hesitant taking on any major expansions until the longer-term pace of economic activity is clearer. 

IMPLICATIONS: Right now, it is all about the vaccine, and the news is all good.  Doses should be reaching the public by the end of the year or early next year and vaccinations should ramp up as we go through the first half of 2021.  What needs to be seen is whether the public accepts the vaccine and doesn’t still think that politics is driving the delivery of the product.  The introduction of politics into the process created negative views on both sides of the political divide, but now that it is here, we could see attitudes change significantly.  But if we believe the scientists, and we should, it could take much of next year before the nation is largely immunized.  That would mean the number of cases and deaths are likely to be high through the first half of 2021 and restrictions will not be easing, let alone disappearing soon.  So, the economic moderation that I and most of my colleagues have been expecting is coming.  That, of course, seems to mean nothing to investors.  The markets went up without any hope of a vaccine, gains were sustained when the possibilities of one coming soon were raised and accelerated when the announcements were made.  When it comes to Wall Street, the pandemic was a nonevent.  For Main Street, it was hardly that.  Indeed, if we don’t get another significant stimulus package soon, with programs ending and restrictions rising, first quarter growth could disappoint.  But again, investors are looking through the first half of the year, so exuberance is likely to be sustained, even if most economists really have no idea what the second half of 2021 will look like.