KEY DATA:  ISM (Manufacturing): -1.1 points; Orders: -1.1 points; Employment: +3 points/ Construction: +0.1%; Private: +0.4%; Private Residential: +1.1%

IN A NUTSHELL: “With manufacturing strong and construction starting to rebound, any economic slowdown is likely to be fairly modest.”

WHAT IT MEANS: The economy boomed in the spring, even if many economists expected even stronger growth.  That said, most forecasts, including my own, see activity rising more moderately in the quarters to come.  The issue, is how much of a slowdown should we expect going forward?  Right now, it doesn’t look like it will significant.  The Institute for Supply Management reported that manufacturing activity grew at a “slower” pace in July than we have seen in six months.  Still, the overall index level was pretty strong.  Keep in mind, this is a diffusion index.  If businesses expand one month but only retain that pace the next, the index declines.  To highlight that point, the new orders index eased.  What happened was that a large number of companies reported that demand was stable, rather than rising.  In contrast, a smaller share reported that orders had declined.  Indeed, only 3.3% said they were lower, compared to 8.2% that said demand had declined in June.  In other words, demand solidified, at a high level, rather than accelerated in July, which is not that bad.  Similar results were seen in most of the other components, so don’t look at the decline in the headline number as saying anything.  On the clearly positive side, employment, which had eased minimally in June, picked back up in July.  Also, backlogs continue to expand at a rapid pace, indicating that production and hiring should improve going forward.

The housing numbers haven’t looked great lately.  Nevertheless, the construction sector remains solid.  Construction spending rose modestly in June, but there was a solid rise in private residential activity.  A sharp drop in road construction restrained activity.  State and local government spending patterns have been driven by federal government assistance, while revenues from taxes, such as gasoline taxes, are still falling.  That is affecting infrastructure spending.  That could change if the bipartisan bill that is making its way through Congress actually gets passed.IMPLICATIONS:It’s the first week of the month and that means Friday is the big day for the markets as the July jobs report will be released. Estimating the number is difficult as the reopening of firms and government offices raises issues about the accuracy of the seasonal adjustment factors.  It’s not the season that is leading to the surge in hiring we are seeing.  The consensus is for something in the 800,000 range, similar to the 850,000 June number, but it could be a couple of hundred thousand higher or lower.  I’ve seen estimates that range from 350,000 to 1.6 million, so don’t get too bulled up or disappointed if the number is viewed as a “surprise”.  Regardless, the economy is still moving forward solidly.  Today’s data point to that.  It is just that we have had unsustainable growth for the past year.  It is hard to think that the 12.2% growth from second quarter 2020 to second quarter 2021 will be repeated anytime soon.What investors have to start getting their minds around is what the pathway to normal growth will look like.  How many additional quarters of well above 2% trend growth can we have?  The forecasts are made uncertain by issues such as government policy, the Delta or other virus variants and consumer behavior.  Specifically, what will the infrastructure and budget bills look like?  How much of the spending will occur over the next year or into the future?  Will the cutbacks in federal assistance to workers and businesses lead to slower income growth, spending and hiring?  Will firms that stayed afloat because of government programs start going out of business and if so, how many?  Will the virus get worse, be brought under control again or just become part of life?  How quickly will consumers, who have shopped ‘til they dropped in reaction to the economy reopening, resume more normal spending patterns?  It has never been easy to forecast the economy, but at least we have had trends to fall back on.  Right now, non-traditional economic factors may be the real drivers of growth over the next year, so take any forecast, including mine, with a grain of salt.