U.S. Manufacturing and Construction
The July ISM manufacturing index fell to 56.3 from 57.8 and that is about in line with the estimate of 56.4. After rising by 4 pts in June, new orders fell by 3.1 pts to 60.4. The 6 month average is 61.8. Backlogs fell 2 pts to 55 after rising by 2 pts last month. It too is back below the 6 month average. Export orders also gave back its 2 pt rise in June and stands at 57.5, a touch below the 6 month average. Employment fell 2 pts, also giving back its June gain. Inventories at the manufacturing level rose 1 pt to exactly 50 while they fell by 1.5 pts with customers to back below 50 at 49. Employment was down by 2 pts to 55.2 but after rising by 3.7 pts in June. It is exactly in line with the half year average. Coincident with the recent rise in commodity prices, prices paid jumped by 7 pts to 62 and is at a 3 month high although it still remains 8.5 pts below this year’s peak. 14 industries saw rising price pressures versus just 9 in June.
Notwithstanding the 1.5 pt m/o/m drop, 15 of 18 industries surveyed saw growth in July, the same as seen in June. With respect to labor and cost issues that we are watching closely because what it means for Fed policy, ISM said this, “Business Survey Committee Members are beginning to mention an increase in turnover, with employees leaving for other opportunities. Overall, labor issues are becoming more prevalent…Many Business Survey Committee Members are commenting on suppliers struggling to keep up, largely due to labor retention, recruitment and stability issues.”
Bottom line, manufacturing in Q3 started out in a similar fashion as that seen this year. The print of 56.3 is about identical to the average seen in Q1 and Q2 combined. Thus, confidence has held steady after the election but hasn’t changed much since the initial reaction. Export growth has been the particular standout year to date with the improved state of global trade. Just as everyone though is getting nonchalant with inflation again with the recent downtick in the monthly stats, the ISM comments follow the recent rise in commodity prices we’ve seen: “The Business Survey Committee noted price increases in many areas, including metals (steel, aluminum, non-ferrous metals, precious metals); food products, including corn and wheat; electronic components; lumber and wood products; and chemicals, including several types of plastic resins.” With respect to the Fed, as long as we keep getting economic data that is little changed at the current pace of activity and certainly if commodity prices continue to rally, QT is starting in a bit more than one month.
We might see a trim to Q2 GDP estimates after construction spending unexpectedly contracted in June by 1.3% m/o/m vs the estimate of up .4%. This was only partially cushioned by a 3 tenths upward revision to May. Private residential construction was negative for all 3 months of Q2 and that was seen in Friday’s GDP data. Nonresidential construction rose one tenth but is down for 4 of the past 6 months. When Fed members start talking about concerns with commercial real estate, assume bank regulators are tapping every bank CRE loan officer on the shoulder. There was also a big drag in public construction spending and that was a key factor too in the headline decline. This particular number is never market moving.