Written by Steven Hansen,
It was another strange week from an economic point of view. It is hard to quantify the economic impacts of tariffs on Mexico – or the banning of cruise ships from Cuba. I know some like to throw dollar signs at each event – but the economy has symbiotic relationships where events can have impacts well beyond what is imagined or seemingly major events may have little impact at all.
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All I know for sure is that the economy is not in the best of shape right now even with the Federal Reserve considering lowering the federal funds rate. This flies in the face of improving GDP which seems to have disconnected from the world of Joe and Jane Sixpack.
The economy is impacted by a range of new “things”:
- the younger generations are spending differently – what is being bought, when it is bought, or even if it is bought at all
- extraordinary monetary policy has created a situation where the economy is acting differently and has created a New Normal. The problem is that no one knows what normal is any more.
- there was an interesting statement from the Association of American Railroads (AAR):
“The current weakness in the rail traffic numbers is due to a combination of factors,” said AAR Senior Vice President of Policy and Economics, John T. Gray. “These include flooding in the Midwest that’s been hindering the operations of railroads and many of their customers. More important is heightened economic uncertainty that’s being made worse by increased trade-related tensions; higher tariffs leading to reductions or disruptions of international trade, and lower industrial output. In addition, some rail markets are undergoing rapid change. For example, locally sourced frac sand in Texas is displacing sand that used to be shipped in by rail. Just by themselves, these reduced sand movements are having a material negative impact on total rail carloads.” - to a large extent, Boeing’s 737 MAX is a significant reason exports are looking weak.
- employment is acting strangely with both ADP and BLS coming in with very poor data.
- It is hard for me to understand what is going on in manufacturing – it is contracting year-over-year.
One would think that robotics and trade wars would favor domestic production. So much for thinking …
PS: Going into the Great Recession Industrial Production was a trailing indicator for the decline in GDP. Could it now be a leading indicator? Was the old normal (2007) really normal or is the new normal really normal? As I said before – so much for thinking …
Economic Forecast
The Econintersect Economic Index for June 2019 long term decline began in July 2018 – and continued this month. This forecast flies in the face of the continuing improvement trend of Real GDP. There currently is a disconnect between GDP and the Econintersect Economic Index. Part of the reason is that GDP adjusts for trade, and we believe imports are an essential element of economic activity on Main Street. Further, GDP believes economic activity includes inventory, whilst Econintersect ignores inventory. If imports and inventory were ignored – GDP growth would have been less than half of the headline number.
Economic Releases This Past Wee
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.
| Release | Potential Economic Impact | Comment |
|---|---|---|
| April ISM & Markit Manufacturing Surveys | little change from soft growth | The ISM Manufacturing survey declined but continued in expansion. The key internals were mixed. The Markit PMI manufacturing Index remained barely in positive territory and declined. Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed’s Industrial Production index growth rate to be around the same level of growth as last month. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession. The ISM and Markit manufacturing surveys were similar this month.
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| April Construction Spending | Inflation-adjusted growth in contraction | The headlines say construction unchanged month-over-month. Our analysis shows the rolling averages declined. The rolling averages declined. Also note that inflation is grabbing hold, and the inflation-adjusted numbers are deep in contraction.
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| April Factory Orders | manufacturing continues to slow | US Census says manufacturing new orders declined month-over-month. Our analysis shows the rolling averages declined, and inflation-adjusted growth is in contraction year-over-year. According to the seasonally adjusted data, it was civilian/military aircraft and ships which caused the decline. The data in this series is noisy so I would rely on the unadjusted 3 month rolling averages which declined. Remember the headline numbers are not inflation adjusted – and the inflation-adjusted year-over-year numbers are in contraction.
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| April CoreLogic Home Prices | n/a | CoreLogic’s Home Price Index (HPI) shows that home prices in the USA are up 3.6 % year-over-year (reported up 1.0 % month-over-month). CoreLogic HPI is used in the Federal Reserves’ Flow of Funds to calculate the values of residential real estate. The quote of the day was in this data release:
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| May ADP Employment | spending slowing | ADP reported non-farm private jobs growth at 27,000 which was well below the range of expectations. This was the lowest growth since 2010. This month the rate of ADPs private employment year-over-year growth is well below the tight range seen over this year. The rolling average of the year-over-year rate of growth declined this month after being unchanged for the last 8 months. Last month’s employment numbers were revised down.
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| April Trade Data | slowing of trade is not a good sign | Trade data headlines show the trade balance slightly improved from last month – and both exports and imports declined. The data in this series wobbles and the 3-month rolling averages are the best way to look at this series.
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| 1Q2019 Productivity | A simple summary of the headlines for this release is that productivity growth significantly improved and labor cost growth significantly slowed (now in contraction year-over-year). The overall view this quarter is that productivity is up 2.4 % from the same quarter one year ago (last quarter productivity was up a revised 1.3 %), while unit costs are down 0.8 % (last quarter labor costs were up a revised 2.5 %).
| |
| May BLS Employment | poor data | They say employment confirms were the economy stands – if so the economy sucks. The headline seasonally adjusted BLS job growth was well below expectations. The establishment and household surveys reasonably correlated. This was a poor jobs report and well under expectations. Jobs growth in 2019 is 397,000 people below the pace of last year. Jobs growth to-date is the worst since 2016. The trends show a deteriorating employment picture. Clearly the Federal Reserves continued statements about an improving jobs situation is bogus. The economically intuitive sectors were positive.
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| April Wholesale Sales | better month but the trend is still down | The headlines say wholesale sales declined month-over-month with inventory levels very elevated. Our analysis shows an acceleration of the rate of growth for the rolling averages. Overall, the rolling averages tell the real story – and they improved this month. However, one month is not a trend and this sector’s growth continues to trend down. Inventory levels this month remain at recessionary levels.
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| Surveys | mixed signals | May ISM and Markit Services Survey – The ISM non-manufacturing (aka ISM Services) index and the Markit PMI Services Index continued their growth cycle but have a different outlook on the services sector. Both services surveys are in expansion – but the trend directions are different. The Markit Services index is nearing no growth. |
| Weekly Rail Counts | Definitely not positive news | Rail so far in 2019 has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the year-to-date has slipped into contraction.
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Links To All Of Our Analysis This Past Week
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