{"id":1749,"date":"2020-06-01T13:16:03","date_gmt":"2020-06-01T17:16:03","guid":{"rendered":"https:\/\/naroffeconomics.com\/?p=1749"},"modified":"2020-06-01T13:16:03","modified_gmt":"2020-06-01T17:16:03","slug":"may-manufacturing-activity-and-april-construction-spending","status":"publish","type":"post","link":"https:\/\/naroffeconomics.com\/?p=1749","title":{"rendered":"May Manufacturing Activity and April Construction Spending"},"content":{"rendered":"\n

KEY DATA:<\/strong>  ISM (Manufacturing): +2.6 points; Orders: +4.7\npoints; Production: +5.7 points; Employment: +4.6 points\/ Construction: -2.9%;\nResidential: -4.5%; Nonresidential: -1.8%<\/p>\n\n\n\n

IN A\nNUTSHELL:<\/strong>  \u201cThe reopening is slowing the decline in\nactivity.\u201d<\/em><\/strong><\/p>\n\n\n\n

WHAT IT\nMEANS:<\/strong>  The economy is reopening and we are starting\nto see the economic numbers look less ugly. \nNot, they are not good, but terrible can be an improvement from\nhorrendous, so I will take it.<\/em><\/strong> \nConsider the state of manufacturing. \nThe Institute for Supply Management\u2019s May index rose. <\/em><\/strong> On the surface, that looks good and in this\ncase, up is always better than down.  But\nwhile just about every component increased, the levels still point to massive\nproblems in the sector.<\/em><\/strong>  Consider\nnew orders, which seemed to be a lot better. \nNot really.  While the percent of respondents\nsaying demand and production improved, the percent saying orders and output were\ndown remained above fifty percent.  What\nis happening is that conditions are worsening at a slower pace.<\/em><\/strong>  That was also true with employment. The share\nsaying payrolls were down fell to 41% from 46% in April, indicating that lots\nof firms are still downsizing.  <\/p>\n\n\n\n

As for construction, it is actually holding in\npretty well.  Yes, activity declined in\nApril but less than expected.  Most of\nthe drop was in residential.<\/em><\/strong>  Given the\ncollapse of starts, the drop was much lower than forecast. States had started\nallowing construction to resume earlier than other activities, so I don\u2019t\nexpect construction to be the weakest link this quarter.<\/p>\n\n\n\n

Commentary:<\/strong> Don\u2019t take the data at face\nvalue.<\/em><\/strong><\/p>\n\n\n\n

We are entering a difficult time for the data mills,\nwhich includes the government, the Fed, industry groups and those private\nsector companies that produce numbers. \nGovernment actions have created special circumstances that raise\nquestions about the true meaning of the numbers. <\/p>\n\n\n\n

The first and maybe biggest issue is that the seasonal\nadjustment factors may be largely meaningless. \nChanges in activity are likely occurring more because of states allowing\nactivities to occur rather than normal seasonal changes. Seasonal factors\ncannot adjust for that.  Thus, while all\nof the data creators are doing the best they can, the seasonally-adjusted data\nthey produce are suspect. The employment numbers on Friday are likely to be\nreally ugly, but they will suffer from an inability to decipher what was going\non due to seasonal changes and what was happening as a result of government\ndecisions or economic conditions.  <\/p>\n\n\n\n

The second issue, which is something only we data\nwonks worry about, affects certain types of measures, such as diffusion\nindices.  For example, the ISM report\nreferenced above is a typical diffusion index in that it asks if the measure\nunder consideration (orders, production, employment etc.) was better (higher),\nthe same or lower (worse).  The\ndifference between better and worse is calculated, seasonally adjusted and\nturned into an index.  Consider the case\nof a firm that closed down its production line in April.  That month, it reported that output declined,\nwhich lowered the overall index.  But in\nMay, if it was still shuttered, it reported that output remained the same i.e.,\nzero.  With a diffusion index, going from\ndown to unchanged actually increases the index level.  That would happen despite the fact that the\nfirm still produced nothing.  In normal\ntimes, the ebb and flow of these changes even out.  In times like this, looking at the overall\nindex level rather than the components can be very misleading.  Unfortunately, under the current\ncircumstances, even the data nerds who dig into those details are having trouble\nunderstanding what is happening.<\/p>\n\n\n\n

The final issue is the one I mentioned in my\nunemployment claims report.  To the\nextent that government policy was designed in a way that intentionally or\nunintentionally masks the true nature of the data, the numbers become suspect.  If the PPP causes firms to hire people that\ndon\u2019t actually produce anything, and that is likely given the spending\nrequirements, the private sector employment numbers are corrupted.  A worker gets moved from unemployment,\nlowering that number, and is counted as employed, raising that number.  But that worker effectively remains on the\ngovernment payroll (paid by a PPP grant) and still doesn\u2019t produce\nanything.  The employment and\nunemployment numbers are artificially improved, but nothing changed.  We have no measure of those workers, so the\nbest we can say over the next few months is that the payroll data overstate the\ntrue state of things while the unemployment rate understates what is happening.  Keep that in mind when you see the next few\nmonths of employment reports.  <\/p>\n","protected":false},"excerpt":{"rendered":"

KEY DATA:  ISM (Manufacturing): +2.6 points; Orders: +4.7 points; Production: +5.7 points; Employment: +4.6 points\/ Construction: -2.9%; Residential: -4.5%; Nonresidential: -1.8% IN A NUTSHELL:  \u201cThe reopening is slowing the decline in activity.\u201d WHAT IT MEANS:  The economy is reopening and we are starting to see the economic numbers look less ugly.  Not, they are not … Continue reading May Manufacturing Activity and April Construction Spending<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-1749","post","type-post","status-publish","format-standard","hentry","category-economic-indicators"],"_links":{"self":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts\/1749","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1749"}],"version-history":[{"count":1,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts\/1749\/revisions"}],"predecessor-version":[{"id":1750,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts\/1749\/revisions\/1750"}],"wp:attachment":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1749"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1749"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1749"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}