As I was traveling last week, I did not write about several data series that I normally update. I plan on taking care of that this week. There’s also a little excitement in the markets today. Typically when there has not been drastic *hard* news, the action is all about leveraged positions being unwound in disorderly fashion, setting up a “V”-shaped market correction. We’ll see.

In the meantime, this morning the ISM non-manufacturing index for July was reported. Since I have started paying more attention to this as part of an economically weighted short term forecasting tool along with the ISM manufacturing index, which is one of the items I wasn’t able to get to last week, let’s take a look now.

Last Thursday the manufacturing index deteriorated further, with the headline number declining from 48.8 to 46.8, and the more leading new orders subindex declining from 49.3 to 47.4. Since 50 is the dividing line between expansion and contraction, that puts both metrics further into contraction (although note that both were lower during 2022 and also during 2015-16, when there were no recessions):

(Click on image to enlarge)

This morning the non-manufacturing index bounced back from contractionary levels in June, with the headline index increasing from 48.8 to 51.4, and the new orders subindex increasing from 47.3 to 52.4. That puts both metrics back in expansion:

Since the turn of the Millennium, when we use an economically weighted average of the non-manufacturing index (75%) with the manufacturing index (25%), it has generated a much more reliable signal, when we use the 3 month average, requiring it to be below 50. 

So what does it tell us now? Including July, here are the last sis months of both the manufacturing (left column) and non-manufacturing index (center) numbers, and their monthly weighted average (right) :

FEB 47.8  52.6. 51.4

MAR 50.3. 51.4. 51.1

APR 49.2  49.4.  49.3 

MAY 48.9. 53.8. 52.5

JUN 48.5. 48.8. 48.7

JUL. 46.8. 51.4. 50.2

And here is the same data for the new orders components:

FEB 49.2  56.1. 54.4

MAR 51.4. 54.4. 53.6

APR 49.1. 52.2. 51.4

MAY 45.4. 54.1. 51.9

JUN. 49.3  47.3. 47.8 

JUL.  47.4. 52.4. 51.2

While the single month average for both the headline and new orders components showed contraction in June, it did not trigger a signal based on the three month average. For July, the current three month weighted average of the two for both the headline and new orders components is the same: 50.3.

Once again, the recession warning signal has not been triggered. And once again, as I wrote last month, “the signal for the combined weighted ISM indexes remains expansionary - but just barely - in its forecast for the next few months.”

Just like last Friday’s Establishment Survey portion of the jobs report, this is a vary weak expansionary economy. The Fed should have cut last week. This is more data that it should start cutting rates at its September meeting, if there are no panic-induced emergency cuts before then.

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