Written by Steven Hansen
Pundits are posting that manufacturing is improving. I too feel that within the 1H2020 that manufacturing data will demonstrate an improvement trend – but cutting through the noise shows that the improvement has not happened yet.
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These improvement headlines were based on the Institute for Supply Management’s (ISM) survey manufacturing index rose in December to 50.7. THESE NUMBERS ARE BASED ON A SURVEY – not real data. The good news in all of this is that the ISM’s manufacturing index poked above 50 after being in contraction for the previous 5 months.
But consider that a competing survey from Markit was never in contraction and marginally declined in January.
Holding this ISM manufacturing survey and other manufacturing surveys accountable for their predictions, Econintersect maintains the following bar chart comparing the hard data from the Industrial Products manufacturing subindex (blue long bar) and US Census manufacturing shipments (long red bar) to the ISM Manufacturing Survey (short purple bar).
It is interesting to note that during the 2H2019, the ISM survey was in negative territory and either or both of the Federal Reserves Manufacturing and/or Census Manufacturing declined each month. On the other hand, for the 1H2019 – the ISM manufacturing survey was in positive territory whilst either or both of the Federal Reserves Manufacturing and/or Census Manufacturing declined each month. The bottom line is that manufacturing struggled in 2019 and ended the year in contraction year-over-year.
Overall, surveys do not have a high correlation to the movement of manufacturing since the Great Recession.
Still, logic dictates that manufacturing is positioned for growth as 2020 growth will be compared to the very weak 2019 data.
Comparing Unadjusted Year-over-Year Change – Manufacturing Industrial Production (blue line) to Inflation-Adjusted Manufacturers Shipments (red line)
Overall I remain bullish on U.S. manufacturing.
Economic Forecast
The Econintersect Economic Index (February 2020) forecast marginally improved this month but still shows the lowest level of growth since the economic slowdown in 2016. The current reading still remains marginally below the 2016 minimum. The ongoing weakness of manufacturing, transport, and imports continues to weigh on our economic forecast – but what is changing is the trend direction which is showing a leveling off or possible improvement.
Although our index is now in negative territory similar to 2016, this penetration into negative territory is not yet severe or persistent – and our opinion is that our index is not suggesting an economic contraction at this point. But any continuing decline might be enough to suggest it is possible a recession is coming.
Our employment forecast is continuing to forecast POORER employment growth than in the first half of 2019.
Economic Releases This Past Week
The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.
Overall this week:
Construction spending is trending up
Manufacturing is at least not declining
January was a strong month for employment gains
Productivity trend shows improvement year-over-year
Transport continues weak and in contraction
Trade, like manufacturing, appears to have stabilized
| Release | Potential Economic Impact | Comment |
|---|---|---|
| December Construction Spending | improvement trend in play | The headlines say construction spending declined month-over-month. Our analysis shows the rolling averages improved. Construction spending is trending upward. The inflation-adjusted data is no longer in contraction. Private construction had been fueling construction growth – but currently, public construction is fueling the growth. Consider this a better report relative to last month.
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| December Manufacturing | little change in soft growth | US Census says manufacturing new orders improved month-over-month. Our analysis shows the rolling averages improved but remaining in contraction, According to the seasonally adjusted data, it was defense aircraft and ships & boats that caused the increase in the headline data. The data in this series is noisy so I would rely on the unadjusted 3 month rolling averages which improved. What should be concerning is the continual reduction of backlog/unfilled orders this year. Note the headline numbers are not inflation-adjusted.
|
| January ADP Employment | very large employment growth | ADP reported non-farm private jobs growth at 291,000 which was well below expectations. A quote from the ADP authors:
Even though the increase in employment was significantly higher than the previous months, the rolling averages for year-over-year employment growth slowed from 1.6 % to 1.5 %. January historically has been a big job gain month for ADP which suggests there is a problem with their seasonal adjustments. ADP employment has not been a good predictor of BLS non-farm private job growth.
|
| December International Trade | with the strong improvement of imports, it may be an indicator of an improving U.S. economy | Trade data headlines show the trade balance grew with imports growing faster than exports. The data in this series wobbles and the 3-month rolling averages are the best way to look at this series. The 3-month average rate of growth declined for imports but improved for exports. Econintersect uses the import trade data as a factor in determining the acceleration or deceleration of the economy – but does not believe the negative trade balance per se is an economic issue. Note that the headline numbers are not inflation-adjusted.
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| 4Q2019 Productivity | labor costs continue to outpace productivity year-over-year | A simple summary of the headlines for this release is that labor costs are growing as fast as productivity on a quarter-over-quarter basis. The overall view this quarter is that productivity is up 1.8 % from the same quarter one year ago while unit costs are up 2.4 %.
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| January BLS Employment | best January since 2015 | The headline seasonally adjusted BLS job growth was well above expectations. The historical data this month was revised as a result of the annual benchmarking. A summary from the report:
BLS reported: 225K (non-farm) and 206K (non-farm private). The headline unemployment rate grew from 3.5 % to 3.6 %. The following chart compares the job gains/losses this month with the same month historically – this is the best month for job growth/loss since 2015.
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| December Sentier Median Household Income | median income has fallen | New data from the monthly Current Population Survey (CPS) indicate that the median annual household income in December 2019 was $65,666, which is $522 (or 0.8 percent) lower than November 2019 ($66,188). According to Gordon Green of Sentier Research, “The relatively large increase in inflation over the past few months has had a negative effect on real median annual household income.” The median is now 5.4 percent higher than the median of $62,303 in January 2000, the beginning of this statistical series. The December 2019 median is 1.1 percent higher than that for December 2018 ($64,945)
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| December Wholesale Trade | generally shows improving growth | The headlines say wholesale sales were down month-over-month with inventory levels remaining very elevated. Our analysis shows an improvement in the rate of growth for the rolling averages which remain in negative territory. This sector’s growth seems to be changing from the long term downtrend to at least a flat trend (if not an actual improving trend line. The rolling averages are in contraction this month.
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| Surveys | manufacturing and services surveys remain weak but generally improved | ISM/Markit Manufacturing – The ISM Manufacturing survey improved and now is in expansion. The Markit PMI manufacturing index remains in positive territory but insignificantly declined. Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed’s Industrial Production index growth rate to marginally improve.
ISM/Markit Services – The ISM non-manufacturing (aka ISM Services) index and the Markit PMI Services Index continued their growth cycle with both indices improving modestly. Both surveys are showing moderate growth. Both indices are at the lower end of the range seen in over 2 years.
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| Weekly Rail Transport | positive news? | Rail, beginning early in 2019, has changed from a reflection of a strong economic engine to contraction. This week, after one year in contraction – has moved into positive territory.
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Links To All Of Our Analysis This Past Week
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