Once again, two sharply contrasting reports to start the month
Once again, two sharply contrasting reports to start the month
One month ago, I wrote that the first reports in September, construction spending and the ISM manufacturing index, showed two contrasting views of the economy. That was again the case today.
As in last month, residential construction spending increased for the month. Below I show it in comparison with single family permits:
Typically construction follows permits. In the past few years, it has been almost coincident with permits. In any event, this is more confirming evidence that in the important and leading housing sector, the decline that started in early 2018 has ended. This is positive news for the economy as a whole in 2020.
But once again the ISM manufacturing index was bad news, falling further below 50 from 49.1 in August to 47.8 in September. Just as badly, the leading new orders component, which one month ago had the worst reading since the Great Recession, at 47.2, barely improved this month to 47.3:
In the past it has typically taken at least two readings below 48 for the ISM manufacturing index to indicate recession. On the other hand, the new orders index is already at a level which has been consistent over the past 70 years with a recession in the very near future – although it is also consistent, as for example in 1966, with a slowdown only:
I should caution that the manufacturing sector in the economy is a smaller segment now than at any point since these series were started almost 75 years ago, so that a downturn there — and there certainly is a downturn there now — will have less repercussions than in the past. Which is a more long-winded way of saying that I think the economy as a whole is more likely to see a slowdown than an outright contraction.
Exactly as in one month ago, the reports, combined, suggest that in Friday’s jobs report there should be a little improvement in residential construction jobs, but suggest a decline in manufacturing jobs (last month there was a very slight increase) — something that has been loudly telegraphed by.
i didn’t see much of a contrast in the construction spending report, which covers more than just the residential outlays NDD highlighted above…and he forgets to adjust those for inflation, which is just as important for construction as for retail..
for the 2 months we have so far, i have 3rd quarter real construction falling at a 5.96% annual rate, or at a pace that would subtract a net of about 0.46 percentage points from 3rd quarter GDP across the components that it impacts (investment in private non-residential structures, investment in residential structures, and government investment outlays, both state and local and Federal)
caveat: i’m using the producer price index for final demand construction as a deflator, in lieu of the multitude of privately published deflators that are used by the BEA for the various components of non-residential investment, so i might be off a bit..