by New Deal democrat

The Bonddad Blog

A preliminary programming note: In addition to the manufacturing and construction reports, today we also get the JOLTS report for March, and updated motor vehicle sales reports. Yesterday we also got the Employment Cost Index for Q1.

I will comment on the JOLTS report later today. I’ll comment on the ECI along with jobless claims tomorrow. Additionally, Wolf Richter made an interesting point yesterday about the sharp increase in repeat home sales prices in the Case Shiller and FHFA reports yesterday. He noted that the reports coincided with the December through early February decline in mortgage rates to 6.6%, which presumably prompted a lot of potential buyers to “strike while the iron is hot,” thereby driving up competition for the limited supply of existing homes on the market. Since mortgage rates have subsequently increased back over 7%, that strongly suggests the spike will reverse in the next couple of months.

With that out of the way, let’s turn to the ISM manufacturing and construction spending reports.

As I’ve noted often this year, these are the two sectors that I would expect to turn down if the continued effects of the Fed rate hikes will start to hit the economy, now that there is no further tailwind from declining commodity prices.

The ISM manufacturing report has diminished in importance as manufacturing has made up a smaller share of the total US economy. Thus, even though it had been in contraction for the last 16 months, to levels that before 2000 would always have meant recession, that didn’t happen in 2023. 

In March both the headline and the more leading new orders numbers were both above the 50 line demarcating expansion vs. contraction. In April they both declined slightly below that level, to 49.2 and 49.1 respectively. Still that is better than their readings for virtually all of 2023. More generally I would say this points to a manufacturing sector that is neither expanding nor contracting, but treading water (Updated with current graph):

UPDATE: Further on manufacturing, a few days ago the BEA updated its series on light vehicle (blue, left scale) and heavy truck (red, right scale) sales. Here’s the longer term view:

The important thing to note is that truck sales are less noisy and tend to turn down first.

Now here is the post-pandemic close-up:

While light vehicle sales have been noisy, but seem to be in a slight downtrend, the downturn in heavy truck sales is far more pronounced, on the order of -20%. While there have been at least three similar downturns in the past (1986, 1996, and 2015-16) without recessions occurring, and as to 2019-20 we’ll never know for sure what would have happened minus the pandemic, there have been other similar downturns that were very much harbingers of recessions roughly one year later. So this is definitely a cautionary signal.

The story was similar as to construction. Nominally total spending declined -0.2% in March, and was down -0.8% from its recent December peak. The more leading residential construction component declined -0.7% for the month, and was down -1.0% from its December peak as well (graph below normed to 100 as of December 2023): 

The good news is that the cost of construction materials (red) declined sharply in March, by -1.4%, so in real terms both total and residential construction spending increased. But since December costs have increased 1.7%, which makes the “real” downturn since December more significant.

So our score for the first data of the month is, manufacturing neutral and construction negative. If this persists, it will be important to see how it affects income, spending and employment. The JOLTS report will shed some light on that.