The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of the Georgia Institute of Technology or the Georgia Board of Regents.
I hope everyone enjoyed their Fourth of July celebrations yesterday! I spent the evening at Harbor Town on Hilton Head Island, South Carolina and the fireworks were amazing! From where I sat on the beach I could see fireworks for various cities including Savannah and Tybee Island, GA. An appropriate celebration of our country’s 248th birthday. Quite young among countries of the world.
Given the holiday week, and the general data release calendar, there isn’t a lot of data to cover this week.
ISM Manufacturing
On Monday we got the June reading from the Institute for Supply Management (ISM) for manufacturing activity (full release here). Experts expected a small increase in the index. However, the index fell for the third month in a row to 48.5. (Any reading below 50 means that the sector is contracting.) As can be seen below, with the exception of one reading, the sector has been in contraction since late 2022.
If there was a bright spot in the report, it was the prices paid index which dropped 4.9 points to 52.1. This is the lowest level since December and is a barometer of future inflation pressure. Further, the new orders index rose 3.9 points to 49.3 — still below 50, but a small sign of progress. However, the employment index fell back below 50 where it had been since October 2023.
The manufacturing sector is clearly in a recession and probably won’t recover until we see some reduction of interest rates, and then an accompanying increase in consumer demand.
ISM Services
Unfortunately, the ISM services index didn’t fare much better (full release here). The services index dropped below 50, falling from 53.8 all the way to 48.8. That is the lowest level since May 2020 when we shut down the entire economy in response to COVID. That’s not good. Expectations were for a very small drop to 52.7 – still above 50. So it wasn’t just a miss….but a miss in the wrong direction. The services sector isn’t growing…it is shrinking.
Nearly all of the sub-components moved down, led by the new orders index which plunged 6.8 points. The services employment index also fell in June. As was the case with the manufacturing index, if there is a bright spot in the report, the prices paid index (a measure of inflation) also fell in June. But that is of little comfort if the entire sector (which represents 2/3 of consumer spending) is slipping into recession. Over the past several years, consumer spending on services has helped to keep the economy going. But continued high rates of interest and inflation are finally putting significant strain on consumer spending.
Factory Orders
Consistent with the ISM manufacturing index, factory orders unexpectedly fell 0.5% in May after three months of posting increases (full release here). Again, the “experts” missed the direction of the move as orders were expected to increase 0.2%. (Oh yea….and April orders were revised…..lower. Shocking.) On a year-over-year basis, orders are up 0.9%. But that is nominal growth. If you adjust for inflation, orders are far lower than they were just a year ago.
“Core” order (orders excluding transportation) declined even more, falling 0.7% for the month. It appears that the Federal Reserve may finally be getting the economic slowdown they want. Of course, one month of data does not a trend make, but for a couple of weeks now, the economic data has been universally moving in the wrong direction.
Job Openings and Labor Turnover (JOLTS)
But then, we get the Job Opening and Labor Turnover (JOLTS) data, which says “maybe not.” After two months of declines, the number of job openings actually rose by 221K in May, which was much higher than expectations. However, digging a little deeper you find that the increase was due to the fact that the Bureau of Labor Statistics (BLS) revised down the April number significantly from what was originally reported. In fact, the BLS has, in subsequent months, revised 14 of the past 17 months lower than was originally reported. I have commented on this before. Statistically speaking, this level of negative revision simply isn’t normal.
Digging into the May number itself, you find that of the 221K increase, 179K (81%) of the jobs openings were in government. So much for the private sector creating jobs.
In total, job openings still exceed the total number of unemployed by about 1.5 million. However, even with the huge jump in government openings, the gap continues to shrink as the labor market tightens and the number of unemployed continues to rise. The Fed raising interest rates has consequences….albeit they have been slow to materialize.
Monthly Employment
The final data for the week came out this morning, and it was the June employment report (full release here). Experts were expecting an increase of 190K and the number came it slightly stronger at 206K. However, as with the JOLTS numbers, the government represented a disproportionally large share – 70K jobs or 34%. The private sector added only 133K jobs while the expectation was for 160K. As has been the case for quite some time, the bulk of job growth was in government and healthcare. In June, the two represented 74% of the total new job growth.
Unlike last month, the household survey moved in the same direction as 116K more people reported having work in June. However, the unemployment rate rose to 4.1% for the month. Why? It was because while 116K more people reported working, 277K more people entered the labor force! That could actually a good thing as it indicates people want to get back to work.
But once again, part of the employment story is that they continue to revise previous months DOWN! April was revised down 57K. May was revised down 54K. So, over the past two months, the number of new jobs are 111K LESS than initially reported. Which, again, is why I like to use the 3-month moving average. On a 3-month moving average, the number of new jobs is down to 177K…the lowest since January 2021. But of course that won’t be widely reported.
So, as I said above, much of the data for the last couple of weeks is pointing to a slowing economy. And that once again has the “experts” predicting a rate cut in September. But with services inflation still running at 4%, cutting rates would be a huge mistake. And the Fed knows it. In my opinion, rates cuts are still off the table for 2024.
Final Thoughts
I will be taking vacation next week and am trying to get a guest writer to fill in for me. However, those attempts have fallen on deaf ears and unwilling participants. As such, I will either try to hammer out the update, or simply take the week off and let it go. The only data coming out next week is consumer credit, CPI, and PPI. While the inflation numbers are important, I think they can wait a week. I really want to just sit on the beach and soak in some sun. Until next time….
