The value of construction put-in-place increased 0.5% (2.5% y/y) during August following two months of sharp deterioration, -1.2% in July and -0.8% in June. Private sector building activity gained 0.4% (4.7 y/y) as residential building activity rose by the same amount (11.6% y/y). Nonresidential building activity improved 0.5% (-2.5% y/y), reflecting a 3.2% increase (3.1% y/y) in the value of lodging construction. Commercial building ticked 0.1% higher (10.4% y/y).
The value of public sector building activity gained 0.7% (-5.1 y/y) after sharp declines in three of the prior four months. Conservation & development (-24.0% y/y), power facility production (-16.1% y/y) and highway & street construction (-6.0% y/y) have been notably weak.
September survey data signalled a further improvement in operating conditions across the US manufacturing sector. The overall upturn was supported by further growth in output and new orders. Strong client demand was a key factor behind the fastest rise in staffing levels so far this year. Business confidence also remained strong, despite slipping since August. On the price front, cost pressures intensified, with input prices increasing at the quickest pace since December 2012. Output charges meanwhile rose at the steepest rate for five months.
The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers’ Index™ (PMI™) registered 53.1 in September, up slightly on the flash reading of 53.0 and rising from 52.8 in August. The upturn signalled a slight pick up in growth momentum and a strong improvement in overall operating conditions across the sector.
Production growth continued to expand at the end of the third quarter, though the rate of growth was unchanged from August’s 14-month low. Nonetheless, a number of panellists suggested the rise in production was due to improved market conditions.
New orders received continued to increase in September. Anecdotal evidence linked the rise to strong client demand and greater marketing activity. That said, the pace of expansion of new orders eased for the second month running. The overall upturn was supported by higher export sales, which rose marginally.
Inflationary pressures intensified as input price inflation accelerated sharply. Moreover, the rate of increase was the fastest since December 2012. Panellists commented that raw material prices – notably for metals – were driven up after the recent hurricanes. Severe weather conditions also contributed to a further deterioration in vendor performance, with lead-times lengthening to the greatest extent since February 2015.
Firms generally passed on greater cost burdens to clients through higher charges. Although the rate of output price inflation reached a five-month high, it was moderate overall.
Backlogs of work continued to rise in September. The pace of accumulation was modest and broadly in line with that seen in August. To help ease capacity pressures, manufacturing firms increased staff numbers again. The rate of job creation was solid and the strongest in 2017 so far.
In line with weaker new order growth, purchasing activity and stock of inputs both expanded at softer rates. Notably, pre-production inventories only grew fractionally.
While the headline PMI remained resiliently elevated in September, despite disruption from hurricanes Harvey and Irma, the details of the survey are more worrying. Output growth was unchanged on August’s 14-month low, and translates into stagnation at best in terms of the official manufacturing output data. Firms’ expectations of future output growth also slipped to a four-month low.
To me, this is a rather weak report:
- Production growth has turned negative.
- Growth in new orders eased for the second month running and was “supported” by higher export sales, which rose only marginally.
- The rate of job creation was solid and the strongest in 2017 so far.
- Input price inflation accelerated sharply but output price inflation was moderate overall.
So, manufacturing production growth turned negative with only a marginal increase in new orders, meaning no change in trend coming soon. Yet, employment growth was “solid and the strongest in 2017 so far”. Meanwhile, costs rose “sharply” and output inflation was “moderate”. Sure sounds like a margin squeeze with very slow demand to me.
Let’s see what the ISM found:
The September PMI® registered 60.8 percent, an increase of 2 percentage points from the August reading of 58.8 percent.
- The New Orders Index registered 64.6 percent, an increase of 4.3 percentage points from the August reading of 60.3 percent.
- The Production Index registered 62.2 percent, a 1.2 percentage point increase compared to the August reading of 61 percent.
- The Employment Index registered 60.3 percent, an increase of 0.4 percentage point from the August reading of 59.9 percent.
- The Supplier Deliveries Index registered 64.4 percent, a 7.3 percentage point increase from the August reading of 57.1 percent.
- The Inventories Index registered 52.5 percent, a decrease of 3 percentage points from the August reading of 55.5 percent.
- The Prices Index registered 71.5 percent in September, a 9.5 percentage point increase from the August level of 62, indicating higher raw materials prices for the 19th consecutive month.
Comments from the panel reflect expanding business conditions, with new orders, production, employment, order backlogs and export orders all growing in September; as well as, supplier deliveries slowing (improving) and inventories growing at a slower rate during the period. The Customers’ Inventories Index remains at low levels.
- Of the 18 manufacturing industries, 17 reported growth in September.
- 13 industries reporting growth in production during the month of September
- Fourteen of 18 industries reported growth in new orders in September
- nine industries reported growth in new export orders in September
- Two manufacturing industries — Nonmetallic Mineral Products; and Furniture & Related Products — reported customers’ inventories as being too high during the month of September.
- 13 reported employment growth in September
Go figure! So far, the record makes me give more weight to Markit’s surveys but American investors don’t. BloombergBriefs provides the evidence:
Reuters explained part of the discrepancies comes from the weight the ISM gives to supply chain and pricing issues in certain industries hard hit by hurricanes and the fact that spikes in these measures were not caused by stronger demand but by supply issues, giving an unwarranted bullish reading to the index.
Europe is not confusing unless your Mario Draghi with the pedal to the metal:
This manufacturing PMI is as good as it gets:
And it comes with strong price pressures:
The upturn in price pressures and accelerating manufacturing growth will further fuel expectations of an imminent announcement from the ECB in relation to tapering of policy stimulus.
At its December 2016 meeting the ECB announced that it would extend its asset purchases to “December 2017 or beyond if necessary”. However, the ECB also trimmed the monthly amount of asset purchases from €80 billion a month to €60 billion a month beginning in April 2017.
The central bank is widely expected to use either its October or November meeting to announce its intention to reduce its monthly asset purchases in 2018 from the current rate of €60bn per month.
IHS Markit then expects the ECB to start the process of gradually normalizing interest rates in the second half of 2018, starting with a lifting of the deposit rate from -0.40% in the third quarter. The first increase in its refinancing rate (currently 0.00%) could come just before the end of 2018.
MUST READ: An interview with Howard Marks: «Nobody knows what will happen»
GOOD LISTENING: Ray Dalio’s interview.
(…) Earnings season is about to get under way and it should show profits grew in the third quarter, though not as much as in the second. Analysts polled by FactSet estimate earnings for S&P 500 companies were 3.7% higher than a year ago. Even after allowing companies’ tendency to beat estimates, actual growth will likely fall short of the second quarter’s 10.3% pace. (…)
Thomson Reuters’ data show Q3 EPS up 4.9%.
The Link Between Economic Growth and Tax Cuts Is Tenuous The Trump administration and Republicans say their plan for tax overhaul will spur economic growth. But history suggests that outcome isn’t assured.
- John F. Kennedy, a Democrat, in 1963 proposed and Lyndon Johnson, also a Democrat, in 1964 signed into a law a cut in the top tax rate from 91% to 70% and a slightly lower corporate tax rate. Economic output expanded at a swift 4.7% rate for the rest of the decade. Republican Ronald Reagan signed a tax cut into law in 1981 and later reduced the corporate tax rate, and economic output expanded at 3.8% for the rest of the decade.
- George H.W. Bush, a Republican, and then Bill Clinton, a Democrat, advanced increases in the top tax rate that became effective in 1991 and 1993, and U.S. output nevertheless expanded at a robust 4.1% annual rate for the rest of the 1990s. George W. Bush, a Republican, cut taxes in 2001 and 2003, and growth expanded at an anemic 1.7% rate for the rest of the decade. And back in the 1950s, when a top rate of 91% prevailed, the economy nevertheless expanded at a steaming 4.5% annual rate.
Truth is, what the Fed does is more important than what Congress does. Monetary policies always trump fiscal programs. And there is also this problem:
Economists generally agree tax cuts that aren’t offset by a decrease in government spending will boost the deficit. “Can tax cuts pay for themselves? The evidence overwhelmingly suggests that this is not true,” Mr. Slemrod said. (…)