Non-Manufacturing ISM Report - Another Weak Redbook Report

Investors are starting to get concerned with the sharp decline in Redbook same store sales growth. It fell from 5.2% to 4.2% in the week of March 2nd. That’s the slowest pace in 10 months. 

Month to date sales were down 1.6%; that’s the 8th consecutive negative reading. The full month year over year gain was 4.8%. Weekly year over year growth is now less than half the 9.3% growth peak in December. 

Even though the Redbook sales report gives us an early look at the consumer, it has been late in accounting for the economic slowdown. 4.2% growth isn’t close to a recession, but the trend is problematic.

Non-Manufacturing ISM Report - PMI Outperforms Manufacturing PMI

Services outperformed manufacturing. This occurred as the ISM non-manufacturing PMI was 59.7 which beat estimates for 57.2 and prior report of 56.7. It beat the high end of the estimate range which was 58. 

This is one of the few spectacular economic reports which suggest the economic slowdown is over. It’s great if services outperform manufacturing. Services is a much bigger portion of the economy.

As you can see from the chart below, the non-manufacturing PMI was 5.5 points higher than the manufacturing PMI. That's one of the largest differences in the past 18 years. I think manufacturing has a better chance of improving than services has of falling. Especially since the trade war has cooled off.

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Non-Manufacturing ISM Report - Specifics Of Non-Manufacturing ISM PMI

This was the strongest PMI reading since November, but that doesn’t tell the whole story. 

As you can see from the chart below, the new orders index increased 7.5 points to the strongest reading since 2005. The business activity index was up 5 points to 64.7. 

Just like the manufacturing report, the prices index fell; this time it fell 5 points to 54.4. Unlike the manufacturing report, it’s still above 50. However, it fell at a quicker pace. This is the ideal situation as inflation is low and new orders are high.   

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New export orders were up 4.5 points to 55. Imports fell from 3.5 to 48.5. This will hurt America’s global trade partners. I expect trade growth to accelerate in the next few months because the tariffs are being rescinded. 

Employment was down 2.6 points to 55.2. This ISM PMI is 1 point above the 12-month average and is consistent with 3.9% GDP growth.

This report is in the range we have seen in the past few quarters. That’s a big deal because growth is supposed to be slowing as the January reading showed. 

Investors are more likely to believe this reading than the January one because it is more recent and happened after the government shutdown ended. The CNBC rapid recap shows the median of 7 GDP growth estimates is 1%. 

Atlanta Fed Nowcast still sees 0.3% growth. 3.9% growth would be amazing. I doubt it will occur, but this report supports the possibility growth won’t be disastrous.

Non-Manufacturing ISM Report - Quotes From The ISM Report

It’s very interesting to get detail on why the ISM PMI is more optimistic than most economic reports. The economic surprise index is -43.1 because most reports are missing estimates. This one beat the high end of the consensus range. 

A retail trade company stated, “Confidence is returning in the marketplace, but tariff surcharges are still in place.” It’s interesting that more firms mentioned tariffs as a negative in this ISM report than the manufacturing one even though this one was stronger. 

Maybe cyclical weakness is more prevalent than weakness created by tariffs for manufacturing firms. It’s tough to think of how much better the non-manufacturing PMI could get without the tariff worries since it was already very good.

A finance and insurance company stated, “The local economy is doing well. Business lending remains competitive. The rise in interest rates have helped boost our net interest margin.” 

It’s great to see the local economy doing well. It’s interesting that business lending is competitive because some lending surveys have shown the willingness to give consumers loans is drying up. This is a more updated report, but one quote can’t compete with the entire NY Fed loan survey. Plus, credit card interest rates have increased.

Non-Manufacturing ISM Report - Four Negative Consumer Charts

Credit card interest rates have spiked recently. 

The chart on the top right shows commercial bank credit card interest rates are the highest in decades. Smart consumers don’t pay interest on credit cards because they pay the loan off at the end of the month. 

As you can see from the chart on the top left, U.S. consumer spending is 17% of world GDP. It is larger than all of China’s GDP. Consumer spending growth was 2.8% in Q4. But growth might be weakening if the Redbook report is accurate.

The bottom left chart shows personal interest payments are increasing because of rising rates. However, they are still low. 

Finally, the bottom right chart shows the current conditions for vehicle and home buying for the top 33% income group have weakened. This implies existing home sales will further weaken. That differs from the growth in the homeownership rate. It’s worth noting that last cycle was unusually terrible which means the conditions for home buying might not lead the housing market with as much accuracy. I wouldn’t be surprised if car buying falls through because the delinquency rate on auto debt is increasing.

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Non-Manufacturing ISM Report - Conclusion

Redbook report is worrisome for the retail sales reports this year. It reflects the economic slowdown. 

ISM non-manufacturing report supports the stock market rally this year as it is one of the few reports showing growth is accelerating. It would be great to see services accelerate while manufacturing falters. 

The consumer is in fine shape even though interest rates are increasing on credit cards. Even though the homeownership rate rose in Q4, housing debt fell slightly. 

Weakest area is auto loans as the delinquency rate is rising. Plus, young people are moving to cities and utilizing micro-mobility and ridesharing apps instead of buying a car.