The seasonally adjusted Business Activity Index reached 53.6 in May, up from 53.1 in April, and signalled the largest rise in overall activity since February.
The rate of growth in new business meanwhile accelerated from April to a four-month high. Panellists noted that stronger demand from new and existing clients led to increased volumes of new orders. (…) For the first time since January, backlogs increased during May. The pace of accumulation, though moderate, was the strongest since last October. (…) The rate of payroll expansion accelerated to a three-month high.
On the price front, the rate of input price inflation softened fractionally from April’s 21-month high. The pace of increase was broadly in line with the series average. Anecdotal evidence generally associated increased cost burdens to higher prices for goods purchased, as well as wage rises.
Panellists noted that higher input costs were generally passed on to clients. Output prices consequently rose for the fifteenth consecutive month, with the pace of charge inflation accelerating from April. The rate of increase was the second-fastest in the current sequence. (…)
The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index rose to 53.6 in May, up from the previous month’s reading of 53.2. Although the rate of growth in both sectors was relatively subdued, the trend for the first five months of 2017 is stronger than the same period in 2016. Similar rates of expansion were seen in the
manufacturing and service sectors, albeit with service providers experiencing a fractionally quicker acceleration than goods producers. However, growth rates remained relatively muted.
Historical comparisons with GDP indicate the PMI is signalling second quarter GDP growth of just over 2%, suggesting there may be some downside risks to IHS Markit’s current forecast of a GDP growth rebound to just over 3% in the second quarter.
The NMI® registered 56.9 percent, which is 0.6 percentage point lower than the April reading of 57.5 percent. This represents continued growth in the non-manufacturing sector at a slightly slower rate. The Non-Manufacturing Business Activity Index decreased to 60.7 percent, 1.7 percentage points lower than the April reading of 62.4 percent, reflecting growth for the 94th consecutive month, at a slower rate in May. The New Orders Index registered 57.7 percent, 5.5 percentage points lower than the reading of 63.2 percent in April. The Employment Index increased 6.4 percentage points in May to 57.8 percent from the April reading of 51.4 percent. The Prices Index decreased 8.4 percentage points from the April reading of 57.6 percent to 49.2 percent, indicating prices decreased in May for the first time after 13 consecutive months of increasing. According to the NMI®, 17 non-manufacturing industries reported growth. Although the non-manufacturing sector’s growth rate dipped in May, the sector continues to reflect strength, buoyed by the strong rate of growth in the Employment Index. The majority of respondents’ comments continue to indicate optimism about business conditions and the overall economy.
- The most surprising development in the non-manufacturing report was the price trend, which dipped into contraction territory (below 50). Anthony Nieves, the chair of the ISM’s Non-Manufacturing Business Survey Committee, said that “there is no true pricing power out there right now.” Companies are simply unable to raise prices substantially without losing orders. Lowflation risks appear to be back (the term “lowflation” was first introduced in the context of the euro area here). (The Daily Shot)
Meanwhile, the Eurozone seems to be acting like one single entity…
…with very strong employment trends…
…and yet, interest rates unmoved.
Source: @Callum_Thomas (via The Daily Shot)
The Conference Board said its employment trends index rose to 133.7 in May from 132.8 in April. The May figure represents a 6.4% increase from last year.
The board’s employment trends index combines eight market indicators, including industrial production figures from the Federal Reserve, job openings from the Bureau of Labor Statistics and jobless claims from the U.S. Department of Labor. The index filters data volatility to more clearly reveal underlying trends in employment conditions. (…)
Seven of the basket’s eight indicators rose in May, with the largest contribution coming from respondents in The Conference Board’s consumer confidence survey who said they find jobs “hard to get.”
Manufacturing sector orders eased 0.2% (+2.9% y/y) following a 1.0% gain, revised from 0.2%. Durable goods orders declined 0.8% (-0.1% y/y), revised from the advance report of a 0.7% fall. Transportation sector orders declined 1.4% (-6.8% y/y). Orders outside of the transportation sector ticked 0.1% higher (4.9% y/y).
Total factory sector shipments held steady (3.1% y/y). (…)
U.S. Productivity Flat in First Quarter U.S. worker productivity was flat in the first quarter, an upward revision from the previous estimate, but still another sign of sluggishness during the eight-year old expansion.
Compared with a year earlier, productivity rose 1.2% in the first quarter, matching the average annual rate of growth over the past decade, but well below the 2.6% growth rate seen in the early 2000s.
Unit labor costs at nonfarm businesses rose at a 2.2% annual rate in the first quarter, revised down from an initial estimate of 3%. (…)
Canada’s housing market gets much attention these days as both the British Columbia and Ontario governments recently took measures to cool their respective bubbly market off.
Casey Research last week took this a huge step further:
Investors beware: the U.S. economy is in for a huge shock. This shock won’t start with auto loans…student loans…or even U.S. corporate debt. It will begin north of the 49th parallel. That’s right. Canada will soon put the U.S. economy to the test. (…)
In short, Canada has a gigantic housing bubble on its hands. And it looks like that bubble is finally about to burst.
When it does, Canada will have serious problems. It could even have a recession or a full-fledged banking crisis. (…)
Canada’s housing crisis could trigger the next global economic meltdown. (…)
Canada is America’s most important trading partner. Every year, we send them $267 billion worth of goods and services. That’s more than we export to China, Japan, and the United Kingdom combined.
In other words, the fate of the U.S. and Canada are highly intertwined. (…)
In short, the U.S. economy is sitting on a tinderbox of debt. And a Canadian housing crisis could very well be the spark that sets the U.S. economy on fire. (…)
Before you take action expecting the tail will shortly wag the dog, consider these facts:
- Vancouver and Toronto are currently the only bubbly housing markets in Canada. Together, they account for 30% of the total Canadian housing market. As David Rosenberg points out, “70% of the country is nowhere near a bubble, with most cities still seeing a situation where it takes 3-4 years of income to buy an average home, which is normal”.
- Nationally, an estimated 68% of Canadians have fixed-rate mortgages, primarily for 5-year terms, as opposed to variable-rate mortgages that would expose
borrowers immediately to higher interest rate charges in a rising rate environment.
- More than 96% of mortgage borrowers have at least 10% equity and 80% have at least 25% home equity. Furthermore, 92% of borrowers since 2014 have home equity of at least 10% and 73% have at least 25% home equity.
- 55% of residential mortgage debt in Canada is insured.
- At 0.28%, the Canadian mortgage delinquency rate has been stable over the past few years and is below the 0.39% average since 1990, below the 0.45% peak
experienced in the recent housing pullback and well below the 0.65% peak experienced during the 1990s housing downturn.
- In Canada, mortgages contain personal covenants giving recourse to the lender. This limits the desire of borrowers to take on potentially unaffordable mortgages and reduces the probability of borrower foreclosing on the property.
One of the most important drivers of downturns in Canada’s housing market is a significant decline in employment. Since 1967, Canadian employment growth has only been negative when U.S. employment growth was also negative.
Stop watching the tail, it’s the dog, stupid.
THE “120 YIELD” SPREAD WARNS
The spread between 10Y and 3M Treasuries is now 1.17.
What does that mean? By itself nothing more than a trend closer to an inverted yield curve. But maybe you should take the time to read this post:
There have been only three fleeting periods in the past half-century when the U.S. unemployment rate was as low as it is today.
This would be cause for celebration but for one disturbing fact: in hindsight, each period was associated with boiling excesses that led to serious economic trouble.
Low unemployment of the late 1960s preceded an inflation spiral in the 1970s. The late 1990s bred the Dot-com bubble and bust. The mid-2000s saw the buildup and collapse of U.S. housing. (…)
Each of those episodes was different, making it hard to map out a systematic connection with low unemployment. (…)
“Hitting a low point on the unemployment rate, compared to history, isn’t a sufficient condition to say we’re near a recession,” said Gregory Daco, the head of U.S. Macroeconomics at Oxford Economics. “The wage-inflation dynamic has not picked up, and that’s clearly something different from the past.” (…)
In the 1990s and from 2005 to 2007, U.S. industries operated at over 80% of their capacity, according to Federal Reserve data. In the 1960s, they were churning out cars, appliances, steel and other goods at nearly 90% of factory capacity. By contrast, U.S. industrial capacity utilization maxed at just 79% in 2014 before an oil bust and industrial slowdown idled many factories and refineries. (…)
Well, there have been many periods since WW2 when unemployment was pretty close to where it is now and they all ended badly. This is end-of-cycle stuff. Click on the Kessler Investment chart to enlarge.
Billionaire hedge fund manager Ray Dalio, who was initially bullish on Donald Trump’s ability to stimulate the economy, is growing increasingly concerned about the potential consequences of his presidency.
“When faced with the choices between what’s good for the whole and what’s good for the part, and between harmony and conflict, he has a strong tendency to choose the part and conflict,” Dalio said in a LinkedIn post Monday. “The more I see Donald Trumpmoving toward conflict rather than cooperation, the more I worry about him harming his presidency and its effects on most of us.” (…)
The founder of the $160 billion Bridgewater Associates said Trump’s decision last week to exit the Paris climate accord, a landmark pact reached by almost 200 countries to curb fossil-fuel production, is the latest example of the president’s approach to conflict.
“Every week is telling in that regard,” he said Monday. “This next week will be no different.” (…)
- Dalio’s piece is here.