31 Month Low In ISM Manufacturing PMI

31 Month Low - Very Weak ISM PMI

It was a 31 Month Low for the ISM PMI. Technically, the May manufacturing ISM PMI is consistent with 2.7% GDP growth. But it’s still a weak reading because it’s down from where it has been recently.

To be clear, since estimates are for 1.7% GDP growth, 2.7% is very optimistic. In 2018, the PMI predicted lofty GDP growth readings that were never hit. Therefore, we must focus on this report in relation to where has been in the past few quarters.

With that framework, this report was terrible as this was the lowest PMI in 31 months. The last PMI that was lower than this was in October 2016 as shown in the chart below. Specifically, the May PMI was 52.1 which fell from 52.8 and was below the consensus of 53. It’s also way below the 12 month average of 56.7.

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Now let’s look at the components of the PMI report.

3 were below 50 which means they were in contraction territory. However, one of the indexes below 50 was customers’ inventories; it’s not bad if inventories are falling.

Notable gains in this report were in new orders and employment as they were up 1 and 1.3 to 52.7 and 53.7. The notable declines were in production and backlog of orders which fell 1 point and 6.7 points to 51.3 and 47.2.

It's interesting that prices went up from 50 to 53.2 given the decline in the breakeven inflation rate and the commodities index. Generally, we’ve seen weakness in inflation, not strength.

Quotes From May ISM Report

 A chemical products firm stated, “The threat of additional tariffs has forced a change in our supply chain strategy; we are shifting business from China to Mexico, which will not increase the number of U.S. jobs.”

It would be interesting to see this firm’s reaction to the new tariffs on Mexico. After all that effort the company made to shift its business from China to Mexico, there’s now a trade war with Mexico.

This firm is basically wasting money to comply with laws that change often. The entire country is beholden to tweets by the President. That’s a big reason the ISM PMI reading hit a 31 month low.

News of the Chinese tariffs came out before this ISM survey was done.

31 Month Low - But the Mexican tariffs weren’t announced yet. A plastics and rubber products company stated, “Newly increased tariffs on Chinese imports pose an issue on a number of chemicals and materials that are solely produced in China. We are expecting increases in raw materials starting June 1.”

It took about 3 weeks for Chinese ships to get to America which is why the tariff affected this company starting on June 1st. Remember when people were saying that 3-week window would give President Trump time to rescind the tariff? Clearly, that was false hope.

Next hope will spring from the G20 meetings on June 28th and June 29th. The weaker the economy and stock market get, the more likely a deal will be struck. Leaders don’t want to see a bear market and a recession occur on their watch. They will get the blame.

Construction Spending Misses Estimates

Monthly construction spending growth was 0% in April which missed estimates for 0.4% growth. The good news is the March report was revised 1% higher to 0.1% growth.

Yearly growth fell from 0.5% in March to -1.2% in April. This wasn’t a good report. Residential construction was down 11.2% yearly. Somehow, after this terrible reading, the Atlanta Fed Nowcast for real residential investment growth in Q2 to improved from -1.6% to -0.3%.

If that Nowcast is accurate, real residential investment is close to ending its 5 quarter streak of declines. I have seen bad reports help Nowcasts a few times. I don’t know how they integrate the data. But the forecasts end up being accurate in the end. Maybe the Nowcast expected even worse numbers to come out.

Private spending on home improvements fell 2.5% monthly.

Single-family spending was unchanged and multi-family spending was up 2.3%. Commercial construction fell 6.7% and non-residential construction growth was 6.4%. Nowcast estimate for real non-residential construction investment growth cratered from -0.9% to -6.9%.

There was huge growth in public spending as you can see in the chart below. Growth was led by highway and streets and educational buildings. Federal spending was up 13.3% yearly and state and local spending was up 15.2%.

This Nowcast makes sense as the estimate for real government expenditures growth increased from 0.7% to 2%. Some traders joke that the infrastructure spending plan that was promised by Congress and the White House never came. However, this data is consistent with some sort of stimulus even though nothing was passed.

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31 Month Low - Markit Manufacturing PMI Also Weak

May flash Markit PMI reading was a complete disaster. I wanted to wait for the final reading before making any bold statements. Manufacturing sector’s final reading was in line with the flash reading.

Final manufacturing PMI was 50.5 which was down one-tenth from the flash reading. That’s the worst reading since September 2009. New orders fell for the first time since August 2009.

This report suggests manufacturing is doing worse than at any time during the 2015-2016 manufacturing recession. Output expectations fell to the joint lowest in the series’ history.

This series started in mid-2012. Employment rose at the slowest rate since March 2017. Output expansion was the weakest since June 2016. Costs increased at the lowest rate since July 2017. As expected, the weakness in demand is overwhelming the cost pressures tariffs are creating.

In the comment section of this report, the Chief Business Economist for Markit wrote, “At current levels, the survey is consistent with the official measure of manufacturing output falling at an increased rate in the second quarter, meaning production is set to act as a further drag on GDP, with factory payroll numbers likewise in decline.”

The manufacturing sector is leading the economy lower.

This reading was weaker than the ISM PMI. If the service sector Markit PMI, which comes out on Wednesday, shows similar weakness, calls for a recession will increase.