Jobless claims at 215k were about as expected and up from 207k last week. The 4 week average though ticked down to 212k from 213k because a print of 222k dropped out. Continuing claims, delayed by a week, did tick up by 22k after falling by 12k in the week prior. The bottom line remains that the pace of firing’s remain modest but considering the softness in manufacturing we need to start watching out for any employment impact.
On manufacturing, the ISM July index fell to 51.2 from 51.7 and that was below the estimate of 52. The last time it was lower was in August 2016 leading up to the election when it broke below 50. New orders did rise by .8 pts but only after falling by 2.7 pts in June. Backlogs were terrible, dropping to just 43.1 from 47.4 and that’s the weakest since January 2016. Exports fell back below zero again at 48.1 from 50.5, the lowest since February 2016 while imports fell to 47 from 50. Inventories were up slightly but are still below 50. Employment fell 2.8 pts to 51.7, the smallest figure since November 2016. Lastly, prices paid were down by 2.8 pts to 45.1, the least since February 2016.
Of 18 industries surveyed only half saw growth, the least amount of industries saying so since September 2016. That’s down from 12 in June.
The ISM said “Comments from the panel reflect continued expanding business strength, but at soft levels. July was the fourth straight month of slowing PMI expansion…Respondents expressed less concern about US/China trade turbulence, but trade remains a significant issue. More respondents noted supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month is evenly mixed.”
As for those like me that is awaiting higher inflation as a result of the tariffs, here is a quote from a furniture and related products company: “Tariff surcharges are now being passed through to all customers.” Here some other tariff related quotes:
Computer/Electronic Products: “China tariffs continue to be a concern. The uncertainty of future tariffs involving China, Canada, and Mexico is also a concern. China tariffs for electronic parts are averaging 17%.
Plastics/Rubber Products: “All aspects of business remain strong, but we’re starting to see the frictional effect of tariffs on exports.” At least this company’s business is strong.
Electrical Equipment, Appliances and Components: “General business trends are continuing to show signs of weakness resulting from tariffs and cost impacts of importing and exporting.”
In response Treasury yields are falling to the low of the morning and the 3 month/10 yr spread is inverting to 11 bps from 5 bps as of yesterday’s close and just 1 bp on Tuesday and prior to the Fed’s rate cut.
Bottom line, I’ll be blunt. The use of tariffs to achieve non tariff related goals was a colossal mistake and the negative effects are now magnifying. Global manufacturing is in a recession and the US is manufacturing sector is on the cusp of one. I’ll say again that we’re going to look back at this time and say WTF were we thinking and how did we so mess up a good thing.
ISM MANUFACTURING
BACKLOGS
Expect lower GDP estimates for Q2 after June construction data hit the tape. Both private and public sector residential and nonresidential construction saw negative signs. The headline figure capturing all fell 1.3% m/o/m, well below the estimate of up .3% and only slightly offset by a 3 tenths upward revision to May.