Manufacturing ISM Report Shows Deceleration

Italian Election Sees Surge In Right Wing Populism

With the Italian election coming in March, we’ve discussed how a win by an unstable political party could be particularly harmful to Italian bonds because the ECB will be cutting its bond buying in half. Since the last time we’ve check on Italian politics, the trend towards populism and Euroscepticism has continued. This is surprising because the economy has had a decent year. Usually you’d expect descent when the economy is weak. One can only wonder what will happen if a recession occurs. Goldman is predicting weakness in the Italian economy next year, which might fuel populism further. The youth unemployment in the south, particularly Sicily, is very high. That is one issue politicians running in the election will claim they can solve. The chart below aims to group the populist parties and the establishment ones in coalitions. The red is the establishment and the blue is the anti-establishment somewhat right-wing coalition. The 5 Star Movement, which is the yellow line, is also a populist party, but it’s not expected to join a coalition with the other parties. The coalitions will partially depend on the results of the election. If you were to extend the trends until the election on March 15th, Matteo Renzi’s Democratic Party would have a very bad night. It’s currently polling at the lowest percentage since 2013.

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Millennials Buying Houses Again?

There’s a popular meme about how millennials aren’t buying houses; it claims millennials are responsible for the tiny home trend and the surge in RV buying because they can’t afford houses. They are getting married later and having kids later which further pushes off home buying. The chart below takes a swing at that meme as it shows the changes in home ownership rates among those ages 20-35 from 2006 to 2016. This chart shows the increases in home ownership rates as the age groups get older. Clearly, the rates were hurt by the financial crisis, but they have rebounded in all the age groups. You can see from the chart that the 28-29 ~> 30-31 group saw a large acceleration in home ownership gains which is a good sign. There’s no question that millennials are still buying homes later in life. The point of this chart is to show they have a pulse when it comes to home ownership. It’s unfortunate that the losses from the financial crisis haven’t been fully recovered even though 2016 is 7.5 years after the expansion started.

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Manufacturing ISM Report Is Good

The manufacturing ISM report along with the non-manufacturing ISM report have been very bullish this year. Even though the economy had the first back to back 3% GDP growth quarters, the expectations in these reports haven’t been met. It’s tough to determine if slight signs of weakness mean the economy is getting weaker or if the ISM reports are becoming more accurate. That’s what happens when you have an economic report that has been inaccurate for a while; you start to question it.

The latest manufacturing ISM report was a slight disappointment which is why I bring that thought process up. The November PMI fell from 58.7 to 58.2. That marks the second straight month where the PMI fell. Even though it fell, this report is consistent with an annualized GDP growth rate of 4.7%. That’s an example of why I say this report isn’t accurate as there is no chance GDP growth will be that high. The PMI average for 2017 is 57.4 which is consistent with a GDP growth rate of 4.5%. Even though this year will have the highest growth rate in this expansion, it’s unlikely growth will be above 3% which shows how far away this report is from being correct. You can make the point that manufacturing is a small part of the economy, but the non-manufacturing report has also showed extreme optimism.

The table below gets into the sub-components of the report. As you can see, it’s a mixture between acceleration and deceleration. That makes sense because it was so close to last month’s report. The key New Orders indicator accelerated which is a great sign. You can see the overall economy has been growing for 8.5 years, but manufacturing has only been growing for 15 months because of the recent manufacturing recession in 2015-2016. It’s interesting to see prices increasing a slower rate because October was the first month to have accelerating CPI growth since January. The question is if this signals the inflation trend is reversing. The employment indicator was basically flat. I am relatively sure we will see wage growth acceleration in 2018; the fact that the employment situation remains the same in manufacturing supports my projection.

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As usual, we will look at some of the quotes from the report. A machinery company said "Strong sales through third and now fourth quarters. Backlog increasing, and capacity at suppliers tightening." We don’t know where its customers are from, but it’s safe to say that the international trade growth helps support companies in that industry. A transportation equipment company said "Overall industry demand remains strong. Continue to have a healthy backlog of orders. Local economy is also strong, with a fairly tight labor market." According to the old Dow theory, the transports doing well signals the economy is healthy. The Dow Transports supports this quote as it was up 5.99% this week. Finally, a food, beverages, & tobacco products company said "Business is strong. Employment is tight. Supplier deliveries have lengthened. A few suppliers are still blaming Hurricane Harvey for the lead times." This shows us how the hurricanes are finally almost done effecting the economy. It will be interesting to see if Q4 GDP growth gets a boost from the rebuilding. The fact that employment is tight also reinforces my forecast for wage growth to improve.

GDP Forecasts Boom

The Atlanta Fed GDP Now had a sharp reversal on Friday as it went up from 2.7% to 3.5%. The NY Fed increased its estimate to 3.93%. The St. Louis Fed’s report has GDP growing at 3.11%. As you can see, judging by the current stats, Q4 is looking like another great quarter, possibly being helped by the rebuilding after the hurricanes.