KEY DATA: ISM (Manufacturing): -1.8 points; Orders: -6.4 points; Employment: +0.9 point/ Construction: +1%; Private: +1.2%; Residential: +3.1%; Nonresidential: -1.7%
IN A NUTSHELL: “The unevenness in the economic expansion can be seen in the continued strength in manufacturing, while business construction keeps fading.”
WHAT IT MEANS: The economy is in good shape, but that does not mean every component is doing well. On the positive side, there’s manufacturing. The Institute for Supply Management’s index of the manufacturing activity fell in January. So, is this segment of the economy starting to fade? Hardly. The index level remains high. The report noted that “Of the six biggest manufacturing industries, five … registered moderate to strong growth in January.” Orders grew strongly, though not as robustly had they had been. Nonetheless, backlogs built even faster and hiring picked up. In other words, the sector kept expanding solidly, but maybe the robust growth should now be categorized as strong.
The construction sector has been the star of the economy, but that is due to the housing market. While private residential activity soared in December, nonresidential construction spending continued the slowdown that we have seen since November 2019. Not surprisingly, lodging led the decline, but it was not the only category to report either declines over the month or over the year. Seven of the eleven components saw construction spending fall in December and all eleven were down when compared to the December 2019 pace. Meanwhile, private residential activity was up almost twenty-one percent over the year.
IMPLICATIONS: If it’s all about the virus, actually the vaccines, then there is good news for the economy. Two more vaccines may become available in the relative near future and that should help reduce greatly the bottleneck caused by a lack of supply and an inefficient distribution system. I keep hearing that there is a lack of health care professionals qualified to give the shots, but that is hard to believe. In the county I live in, none of the pharmacies listed as giving the shots are in chain pharmacies such as CVS, Walgreens or Rite Aid. There are plenty of pharmacists trained to give shots at the chain stores as all of them offer most other common vaccinations. The problem, it seems to me, is that the supply is so limited that it cannot be efficiently distributed to a larger number of locations. Thus, once the supply increases, the rate of distribution should accelerate sharply. The major question then becomes: How many people will not get vaccinated even when the supply is readily available? And if that number is significant, what does it mean for the safety of the population? That ultimately makes a difference as to how fast the economy can return to what will be the next normal. We are moving forward, but it will still take time to get through this, so some additional government support will be necessary. How much we will need is unclear, but as this is likely a situation where if you have to make a mistake, you probably want to overdo it, not do too little. Large numbers of zombie companies would fail and too many families would continue going without if the government winds up not doing enough. But politics and economics operate in parallel universes, so who knows what kind of stimulus bill will be passed. There is likely to be a fairly aggressive spending bill pushed through by the Democrats, and when you add in an aggressive Fed, the probability growth will falter significantly this year is low.