U.S. Factory Activity Shrinks for First Time in 3 Years The manufacturing sector shrank for the first time in three years last month, providing the latest sign that a global manufacturing pullback is weighing on the American economy.
Tuesday’s Institute for Supply Management’s manufacturing index, a widely watched gauge of factory activity, fell to 49.1 in August from 51.2 in the prior month. (…)
The report—coming after data pointing to contracting factory activity in the U.K., Germany, Japan and South Korea—fueled fears that a manufacturing slowdown elsewhere in the world had reached the U.S.
Trade was “the most significant issue” for the U.S. purchasing and supply executives surveyed in the monthly report, said Timothy Fiore, chairman of the ISM’s Manufacturing Business Survey Committee.
“Respondents continued to note supply chain adjustments as a result of moving manufacturing from China,” he added. (…)
Markit’s Manufacturing PMI was 50.3 in August. The ISM PMI has a larger company tilt, suggesting that larger firms are now being impacted by the trade war and declining exports. The Daily Shot has a number of telling charts today:
Source: Pantheon Macroeconomics
The U.S. manufacturing sector is clearly in recession. “Only” 11% of the U.S. economy but add other exporters and all the service economy servicing these companies and their well paid employees and you get closer to 30% impacted.
Jeoff Hall, managing economist for Refinitiv tweeted this interesting chart that, to my knowledge, was not re-tweeted by President Trump:
Tomorrow we get the important U.S. Services PMI which rose to 53.0 in July from 51.5 in June and hooked up the Composite PMI with hopeful details:
July data indicated a faster rise in business activity, supported by more robust domestic and foreign client demand. New orders increased at the quickest rate since March and new business from abroad grew at the strongest pace for five months. (…) Service providers registered the quickest expansion in new orders since March, with the rate of growth accelerating for the second successive month. Foreign client demand also improved, with new business from abroad rising at the sharpest pace since February. (…) The accumulation of backlogs was solid overall and the sharpest for four months.
This is another growing problem for U.S. exporters:
Meanwhile, China’s growing Services sector helps support the economy:
Composite business activity growth improves to four-month high in August
The Caixin China Composite PMI™ data (which covers both manufacturing and services) showed that overall Chinese business activity rose further during August. Though modest, the rate of growth was the quickest recorded since April, with the Composite Output Index rising from 50.9 in July to 51.6.
Activity across the service sector expanded at a faster pace than that seen for the manufacturing sector during August. This was highlighted by the seasonally adjusted Chinese Services Business Activity Index posting 52.1, up from 51.6 in July, signalling the strongest rise in services activity for three months. Manufacturing production rose only marginally midway through the third quarter, though this marked an improvement upon the broad stagnation of output seen in July.
Higher activity levels were supported by greater intakes of new orders at Chinese companies. At the composite level, the rate of new order growth was the quickest seen since April, albeit modest overall. The upturn was led by services companies, who saw a solid increase in new orders that was the most marked for four months. In contrast, goods producers registered broadly unchanged amounts of new work.
Export trends diverged on a sector basis in August, with foreign sales rising at services companies but falling at manufacturers. Service providers registered a solid increase in new export business, despite the rate of expansion softening since July. Manufacturing firms meanwhile saw the steepest reduction in new orders from abroad since November 2018.
August survey data signalled a renewed increase in employment across China. Though only marginal, it was the first time that headcounts had risen since April. The expansion was centred on services companies, who recorded the fastest rate of job creation since June 2018. Companies often linked payroll growth to rising business requirements and forecasts of improving market conditions in the months ahead. At manufacturing companies, staffing levels were broadly stable following a modest reduction during July.
At the composite level, the amount of outstanding work at Chinese firms increased marginally for the third month in a row. A modest increase in the level of work-in-hand (but not yet completed) at manufacturing companies contrasted with a slight reduction at service providers.
Average input costs faced by Chinese businesses rose at the softest rate for seven months in August. This was predominantly driven by a renewed fall in input prices at manufacturers. Though only modest, purchasing costs in this sector declined at the joint-fastest pace since January 2016. At service providers, operating expenses rose at the strongest pace for three months amid reports of greater purchasing prices and labour costs.
Reflective of the trend for input costs, output prices set by manufacturers declined during August, while services companies continued to raise theirs. Notably, factory gate prices fell at the steepest rate since December 2015. Output charges set by service providers rose at a pace that, though modest, was the quickest for 20 months.
Composite data indicated that Chinese firms were generally optimistic that output would increase over the next year. That said, the degree of positive sentiment was little-changed from July and softer than the historical trend. While confidence in the service sector improved to a five-month high, expectations of future output weakened across the manufacturing sector.
SENTIMENT WATCH
Another Recession Sign to Ignore at Your Peril A worrying signal from the ISM Manufacturing Survey follows an inversion of the yield curve, and it no longer makes sense to keep explaining such signs away
(…) Market bulls will be quick to point out that an ISM reading in contractionary territory doesn’t necessarily signal an impending recession. The index did fall below 50 before each of the past three recessions, but it also did so in 1998, 2003 and early 2016. All three reflected genuine stress in the global economy that nonetheless failed to trigger a U.S. recession.
An inverted yield curve, on the other hand, has a much stronger track record as a predictor of recession. The yield on 10-year Treasurys has dipped below that of two-year Treasurys before each of the past three recessions and at no other time over the past 30 years, aside from a couple very brief episodes. The argument for this being a false signal now is that central banks in Europe and Japan have distorted the curve with negative rates and aggressive bond buying, indirectly suppressing long-term U.S. rates.
This isn’t dissimilar to an argument heard prior to the last recession in 2007, though. Back then, optimists argued that a glut of savings in China and other countries with large current account surpluses was driving down long-term rates. Needless to say, anyone buying this story got burned badly.
Both the so-called global savings glut of last decade and the negative interest rates of recent years weren’t just random phenomena but signals of real economic problems.
Market bulls are resting their hopes on a strong U.S. consumer, yet key consumer variables such as unemployment and wages are lagging indicators—well known for trailing developments in the broader economy. If U.S. business activity buckles under the weight of trade tensions and a global downturn, consumers will follow.
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The Market Forces That Propelled a Massive Rally in Long Bonds Recession signals flashed by the bond market may have been exaggerated
(…) That is because part of the recent fall in bond yields—which drives bond prices higher—has been caused by banks, insurers and other investors essentially buying on autopilot, scooping up more bonds because that’s what their pre-existing risk models and investment-hedging strategies tell them to do.
“There was a fundamental driver to this move in yields and that continues to be validated by economic data and the Fed,” said Josh Younger, head of U.S. interest rates derivatives strategy at JPMorgan in New York.
“But the signals provided by the rates markets are being amplified by this hedging activity.” (…)
“The lower we go in long-term bond yields, the more demand starts to increase for certain products: gamma hedging, convexity hedging and closing duration gaps,” said Mr. McAlevey. “You end up with a market that is all buyers and no sellers.” (…)
Hedging activity linked to volatility strategies can also create forced sellers when yields start to rise.
“Gamma hedging works both ways,” he said. “A lot of what’s going on is just going to lead to higher volatility.”
The upshot is that without these flows, the U.S. yield curve wouldn’t have inverted and there would be much less fevered chatter about a coming recession. (…)
The Daily Shot also offers this chart to the debate:
Source: Piper Jaffray
The charts below suggest that we are going to see much weaker industrial production and employment figures in upcoming releases. Manufacturing output is already down 1.6% year to date with output 5% below the November 2007 peak. It offers bad news for Friday’s US jobs report too with today’s ISM employment component pointing to a 10,000 contraction in manufacturing employment – this would be the first negative manufacturing jobs growth for three years. (ING)
The Atlanta Fed:
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2019 is 1.7 percent on September 3, down from 2.0 percent on August 30. After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management, and this morning’s construction spending report from the U.S. Census Bureau, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private fixed investment growth decreased from 3.2 percent and 0.9 percent, respectively, to 3.0 percent and -0.2 percent, respectively.
Friday we get the employment report. Here’s a preview:
The Paychex | IHS Markit Small Business Employment Watch shows job growth declined again in August while wage growth stabilized. At 98.01, the national jobs index fell 0.17 percent from last month and 0.76 percent over the past quarter, contributing to a 1.22 percent year-over-year drop in the rate of small business job growth. Hourly earnings growth settled at 2.61 percent ($0.69) in August, and weekly hours worked showed positive growth for the first time in 2019. (…)
“Small businesses are adapting to the challenges of the tight labor market by increasing hours and earnings,” said Martin Mucci, Paychex president and CEO. “In August, we saw an increase in weekly hours worked, as well as higher hourly earnings growth compared to this time last year.”
Trump was so angry after China’s trade retaliation that he wanted to double tariffs
(…) Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer then enlisted multiple CEOs to call the president and warn him about the impact such a move would have on the stock market and the economy. (…)
China’s ruler-for-life Xi Jinping stated in a speech [yesterday] at the Central Party School in Beijing that his country faces “concentrated risks” and “must carry out a resolute struggle” against its adversaries. (…)
According to a report today from the South China Morning Post, the government’s Financial Stability and Development Committee promised “enhance[d] countercyclical measures in macroeconomic policies. . . to ensure sufficient liquidity and reasonable growth in credit.” Particulars, per the SCMP, included ordering financial institutions to issue local government spending bonds, as well as urging those local governments to “fully tap [their] investment potential.” (ADG)