U.S. Construction Spending Remains Strong

The value of construction put-in-place increased 0.6% during September following an unrevised 0.7% August gain. Three-month growth held steady at 7.6% (AR), down from 29.2% in the second quarter. A 0.4% September rise had been expected in the Action Economics Forecast Survey.

Building activity in the private sector increased 0.6% following a 1.1% August gain. Activity increased at an 11.1% rate during the last three months. Residential building activity rose 1.9% (18.3% y/y), the sixth consecutive month of strong gain. Single-family building increased 1.3% (12.5% y/y) after a 1.0% rise. Spending on improvements jumped 1.5% (26.5% y/y). Multi-family building rose 4.9% (27.8% y/y). Nonresidential building eased 0.7% (+14.4% y/y).

Public sector building remained firm and gained 0.7% (9.6% y/y) following two months of decline. Office construction was little-changed (9.2% y/y) but power construction declined 3.7% (+15.5% y/y). Water supply spending jumped 4.8% (6.4% y/y) and highway & street construction improved 0.3% (10,4% y/y).

ISM VS MARKIT

Manufacturing Activity Expands at Slowest Pace in Two Years U.S. manufacturing activity expanded at its slowest pace in more than two years in October, according to the Institute for Supply Management, a sign factory activity remains under pressure from a weak global economy.

The Institute for Supply Management’s gauge of manufacturing activity fell to 50.1 from 50.2 in September, the purchasing managers’ group said Monday. Readings above 50 indicate expansion. The reading was the weakest since May 2013 and indicates that the sector barely skirted a contraction in October.

Factories saw new orders come in at a faster pace, offering some optimism. But exports shrank for the fifth straight month, a sign of troubles coming from abroad.

The above is from the WSJ which, for some reasons, does not make any mention of the other PMI report from Markit which actually showed a rebound from 53.1 to 54.1 and said that “the latest data signalled a turnaround in growth momentum from the 22-month low recorded in August.” While both surveys saw new orders rise in October, the ISM reading of exports orders is negative while Markit says that “the latest rise in new work from abroad was the third in the past four months, and the fastest since September 2014.”

  

Differences between these two surveys are not unusual (see my Dec . 2012 post: U.S. PMI: Markit vs ISM). I tend to give more weight to Markit’s for the following reasons:

1. While the sub-indices (New Orders, Production, Employment, Supplier Deliveries, and Inventories) in the ISM PMI composite reading are equally weighted, the Markit PMI reading assigns unequal weightings to the five component sub-indices (New Orders—0.3, Output—0.25, Employment—0.2, Suppliers’ Delivery Times—0.15, and Stocks of Items Purchased—0.1, with delivery times inverted) which makes more sense to me.
2. Markit’s survey panel is nearly twice as large as the ISM’s stated panel size, is very closely mapped against the official structure of the economy and uses a different method of seasonal adjustment, calculating the factors every month instead of once per year.
3. These methodological differences have a clear impact. When the Output Indexes from the two surveys are compared against the three-month change in official production data (a widely used comparison for survey and official data), the Markit index has a correlation of 94% compared with 87% for the ISM data (this is based in both cases on the data from mid-2007 onwards, when Markit data were first available). These calculations are from Markit.

That said, the five regional manufacturing surveys from Federal Reserve Districts tend to concur with the headline ISM number in October as Doug Short illustrates:

Digging deeper, RBC Capital’s economists see some positives in the ISM report:

The October ISM manufacturing report is a classic example where the underlying detail is better than the headline. That is easy to say when the two key underlying metrics (production and new orders) both advanced on the month. We have been highlighting the bifurcation between domestic demand and sectors with a greater global touch and this report still fits that theme. Indeed, the reality is even with the advance in new orders, it is still running at a modest pace. The good news is when you drill down into the respondent commentary (see below) you find a definite positive shift in tone from last month. For those industries that hold a restrained view on the backdrop, the strength of the USD is their primary concern. But net-net, the overall better assessment gleaned from the respondent comments is consistent with the advance in production and new orders. Needless to say, this is a definite step in the right direction…

(…) So while the first cut of Q3 topline GDP growth clocked in at a mere 1.5% (on a -1.5ppt drag from inventories), this still came with the private domestic economy expanding at a sturdy 3.2%. Moreover, the latest look at the manufacturing arena, the Chicago PMI, suggests that we could very well be in the process of carving out a bottom there. The internals showed new orders and production at the best reads since January. We have a feeling that massive inventory drag in Q3 might unwind even beyond what we have built in (+0.5ppt to topline in Q4).

Not only is the slowing global growth story not filtering into the broad domestic demand sectors of the US economy, but it seems that any manufacturing impact could be fading as well.

Goldman: Government Spending Is About to Boost the U.S. Economy for the First Time Since 2010

Since the [budget] deal increases defense and non-defense savings over the next two years, Goldman noted that it leaves government spending in 2016 poised to turn into a tailwind for growth for the first time 2010:

“We expect that the deal will shift the overall stance of fiscal policy from neutral in 2015 to a slight boost of 0.3 percent of GDP in 2016,” wrote economist Alec Phillips. “At the federal level, we expect the impulse to go from slightly negative to slightly positive. Along with the ongoing small positive contribution from the state and local sector, this should result in a modestly expansionary overall fiscal impulse in 2016.” (…)

Ed Yardeni plots the governmental drag since 2010:

Already happening as Haver Analytics shows:

MORE ON MANUFACTURING PMIs

PMI reports are of great importance to investors as they paint economic pictures using timely real world unrevised data. I dutifully read and post them each month. I put particular emphasis on trends in new orders since they provide the best advanced warnings of what’s ahead since new orders are the lifeblood for businesses. Following is a summary of Markit’s comments on several developing countries’ manufacturing PMIs with emphasis on trends in new orders:

• South Korea: Supporting the fall in output was a decline in total new orders during the month. A number of panellists mentioned unstable economic conditions
  and a decline in sales from both domestic and international clients as factors behind the latest contraction. That said, similar to production, the rate of decrease was only modest and softer than the average over the current eight-month spell of falls. Meanwhile, new orders from abroad declined fractionally during the month, with the rate of decrease the joint-slowest in the current eight month sequence of contraction. Where new exports fell, several firms mentioned challenging international economic conditions, while some noted a drop in sales volumes from China.
• Taiwan: Production at manufacturing companies in Taiwan continued to decline in October, as has been the case in each month since April. However, the rate
  of contraction eased further from August’s 35-month record to the slowest since May. Companies that cut output generally attributed this to poor economic conditions and fewer new orders. The latter was highlighted by a further fall in total new work in October. As was the case with output, however, the rate of reduction was the weakest seen in five months.
• Vietnam: New business decreased marginally overall in October, the second successive month in which a reduction has been recorded. Panellists linked the
  fall to declining client demand, which was also a factor behind a fifth consecutive monthly contraction in new export orders.
• Malaysia: Production declined at a solid rate at the start of the final quarter of 2015. A number of firms linked the contraction to a poor economy and a lack of
  demand generated from clients. Moreover, the latest decline contributed to the joint-longest sequence of contraction in the series-to-date. Output was matched by a marked decline in total new orders. The rate of contraction was the sharpest in over three years, with a number of panellists blaming reduced demand and
  challenging economic conditions. Data suggested that the decline in total new work intakes was mainly attributed to the domestic market, as international demand rose. New export orders at Malaysian goods producers rose for the second month running in October. Furthermore, the rate of expansion was the most marked since July 2014. According to a number of panellists, manufacturers benefited from the exchange rate which helped to improve price competitiveness.
• Indonesia: New orders from abroad contracted at the second sharpest rate in the history of the survey, with around 30% of panellists recording a reduction.
  October data pointed to another decrease in manufacturing production across Indonesia. Moreover, the rate of reduction was unchanged from the sharp pace noted in the prior month. Lower new orders and a fragile economic situation were the main reasons provided by respondents for the latest decline in output.
• Russia: New orders placed with manufacturing companies in Russia grew for the second successive month in October. The rate of expansion was the sharpest
  since November 2014, despite being modest overall. The increase in new business was driven by stronger demand from the domestic market, however, as new export orders declined.
• India: Output growth eased in October on the back of a slower increase in new orders. Rates of expansion in both production and order books were the weakest in their current 24-month sequences of growth, with panellists reporting challenging economic conditions and a reluctance among clients to commit to new projects. New business from abroad placed with Indian manufacturers rose for the twenty-fifth straight month in October. However, growth was little changed from the marginal pace seen in September.

In all, the second derivative (change in change) suggests that the worst may be over (except for Indonesia and Russia) as new export orders are slowing at a slowing rate…

The rebound in Markit’s China PMI New Export Orders Index is encouraging in that regard:

The rise in exports was the largest since last December and the first increase since June. Anecdotal evidence from exporters was scant, but the data indicate that the recent devaluation of the yuan is beginning to have a beneficial impact on China’s exports.

EARNINGS WATCH

• 359 companies (79.5% of the S&P 500’s market cap) have reported. Earnings are beating by 4.7% (4.6% last Friday) while revenues have positively surprised by 0.1%.
• The beat rate is 70% on EPS, 73% ex-Financials.
• Expectations are for a decline in revenue, earnings, and EPS of -3.7%, -2.4%, and -1.2%. EPS growth is on pace for -0.3%, assuming the current beat rate for the remainder of the season. This would be 6.7% excluding Energy (7.3% last Friday).

John Oliver: Medicaid Gap

Great video via Barry Ritholtz