U.S. Economy Still Expanding; Both Manufacturing And Services ISMs Up

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by: Tim Worstall
Summary

The U.S. economy continues to expand according to our latest forward-looking measure.

The ISM numbers for both non-manufacturing and manufacturing show continued expansion.

We're not seeing any sign of the end of the longest economic expansion of modern times.

We Want To Know When The Expansion Will End

Clearly, a recession means that we'll change our investing stance and strategy. Thus we'd like to know, if we can, when the economic expansion is likely to, or going to, end. While the actual definition of this is two quarters of falling GDP, which is a backward-looking measure, and something we can only know about the past. What we want is something that is forward looking that will tell us something about the future.

This is the value to us of purchasing manager indices and this particular measure from the Institute of Supply Management. Go out and ask people what they're buying and organising to produce things from in the future. That gives us a very good idea of what will be produced in the future. Empirical evidence shows that this is indeed a good measure of the future path of the economy.

The ISM Numbers

Manufacturing is still expanding:

Manufacturing expanded in June, as the PMI® registered 51.7 percent, a decrease of 0.4 percentage point from the May reading of 52.1 percent. This is the lowest reading since October 2016, when the index registered 51.7 percent. "This indicates growth in manufacturing for the 34th consecutive month.

By construction, a PMI of more than 50 indicates expansion, and of less, contraction. In a little more detail:

PMI® at 51.7%

New Orders Unchanged; Production and Employment Growing

Supplier Deliveries Slowing at a Slower Rate; Backlog Contracting

Raw Materials Inventories Contracting; Customers' Inventories Too Low

Prices Decreasing; Exports Growing, Imports Unchanged

We see better results in non-manufacturing:

Economic activity in the non-manufacturing sector grew in June for the 113th consecutive month,

Again in that more detail:

NMI® at 55.1%

Business Activity Index at 58.2%

New Orders Index at 55.8%

Employment Index at 55%

The Split Between The Two Measures

We all do get rather too excited about manufacturing. This is a hangover from earlier economic times. Back when manufacturing was a large and significant part of the US economy. Now it's down into the 10 to 12% range, and of course it's interesting, but it's no longer the beating heart of the economy.

It is true that manufacturing is more volatile over the business cycle than services, so it's still useful as an indicator of changes in that cycle. But it's just not as important as many seem to think it is. The attention paid to this measure is mostly a result of us all having learned our economics in our youth from books written by those who were already old back then.

The non-manufacturing index - what we often call services when looking at the same measure for other economies - is very much more important. Services being some 80% of any modern rich world economy means that the PMI is telling us about the vast majority of what we're interested in. That vast majority of the economy itself.

From Moody's Analytics:

The U.S. non-manufacturing sector is in decent shape, although the breadth of growth is narrowing. The ISM's non-manufacturing index fell from 56.9 in May to 55.1 in June, below consensus expectations. The details were not great. Business activity slipped 3 percentage points, new orders fell 2.8 percentage points, and employment fell 3.1 percentage points. The supplier deliveries index increased 2 percentage points, but this indicates slower deliveries. Inventories rose in June, while exports and imports were unchanged.

The expansion is slowing a bit:

US non-manufacturing ISM (Non-manufacturing ISM from Moody's Analytics)

While it's slowing, we're still very definitely in expansionary territory.

The Economic Information

The economic expansion has been going on for 10 years now. We're all looking for it to stop for we do know that we've not eliminated the business cycle. We're not seeing any sign of it ending yet though. This is what the PMI from the ISM does for us; it gives us a view some month or six weeks into the future.

As to why we're not seeing the end of the cycle yet, I can only give an opinion. Which is that we know two things about the Crash and the following recession. The first is that it was large. Thus there's a certain amount of ground to make up and then we've the normal growth we can expect from new technologies being applied. This is a useful - although non-traditional - explanation of the great boom of the '50s and '60s. The 1930s were so awful - and we can't make much note of the war economy of the '40s - that there just was all that room to catch up.

The second is that we always have thought that recessions caused by financial crises will have long and slow recovery periods. Simply because such a recession isn't just the swings and roundabouts of moods and animal spirits, but a change in the basic underlying plumbing of the economy. We're thus primed to believe that a deep recession caused by a financial crisis will have a long and slow recovery period. Here we are in year 10 and that seems to be being borne out.

Our Investor Takeaway

I can't see any sign of the expansion stopping or even faltering. Nor really can anyone else. Inflation is still below the Federal Reserve's target, so it's unlikely that we'll have a move upward in rates that will cause a recession. The only other cause of economic hard times would be that the expansion itself just runs out of steam. And we're just not seeing that.

Of course, it's more exciting to call a turning point, but none of the information we've got is telling us we're at one. My prediction, based upon the best information we've got, is that the economy is going to continue to grow steadily off into the middle future. After that? Well, we'll just have to keep reading the statistics to see if we can spot that turning point coming.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.