This is a weekly series focused on analyzing the previous week’s economic data releases.
The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening and the rate of inflation is increasing or decreasing.
This week we examine construction spending, the ISM and PMI Manufacturing Indices, personal income and outlays, the initial estimate for Q3 GDP, and the jobs report for October.
Single-family home construction is the major bright spot in this report, leading to a 0.5% increase in overall spending for September, but August was revised from a 0.1% increase to a 0.3% decline. The hope is that the recent improvement in home construction will continue, yet it is still down 4.9% year-over-year. Overall construction spending is down 2% year-over-year. In another sign that capital spending was non-existent in the third quarter, commercial spending on structures declined 0.3%.
PMI and ISM Manufacturing Indices
IHS Markit's manufacturing index (PMI) posted a second consecutive monthly increase from 51.1 in September to 51.3 in October. A level of 50.0 is the line of demarcation between expansion and contraction. The modest improvement in the survey results were broad based, as production, output, new orders and hiring all strengthened to perhaps suggest that the sector has bottomed. It was particularly encouraging to see foreign demand for orders improve in light of trade policy. It is still too early to call a bottom, as survey respondents remain extremely cautious about the future. I would like to see confirmation from the ISM survey.
The Institute for Supply Management's Manufacturing Index saw very modest improvement, rising from 47.8 in September to 48.3 in October. Production and backlogs fell, while employment saw a lessening in contraction. Overall, this report still reflects a manufacturing sector that is in recession with the only signs of improvement coming from foreign demand.
Affirming the improvement we saw from foreign demand in the PMI, new export orders rose 9 points from 41 to 50.4 to be the only sub-index over 50.
Personal Income and Outlays
Personal income rose 0.3% in September and is up 3.5% year-over-year, while personal spending rose 0.2% and is up 2.6% over the past year. The wages and salary component of personal income saw no change last month. The core PCE Price Index (personal consumption expenditures), which is the Fed's preferred inflation gauge, is up 1.7%. This report supports a slow but steady rate of real consumer spending.
The initial estimate for the third quarter rate of economic growth is 1.9%, which results in a year-over-year growth rate of 2%. The mountain chart below reflects the temporary boost we had from the 2018 tax cuts. The rate of annualized growth is likely to continue to slow.
As usual, the rate of growth was fueled by consumer spending, which rose at a 2.9% rate. This was down from the 4.6% rate in the previous quarter. Spending was focused on durable goods (autos). Considering that consumer spending accounts for two-thirds of economic activity, all other segments of the economy contributed zero to the rate of growth on a net basis. Home construction and government spending contributed to growth, while business spending was the greatest detractor for a second quarter in a row. Net exports and changes in inventories had minimal impacts.
October Jobs Report
According to the BEA, payrolls increased 128,000 in October, while the September estimate was revised upward by 44,000 to 180,000 and the August estimate was revised upward by 51,000 to 219,000. There was a notable loss of 36,000 jobs in the manufacturing sector, which was in large part due to the GM (NYSE:GM) strike. There was a 61,000 increase in leisure and hospitality positions, which is bars and restaurants. That's not a good swap.
The unemployment rose to 3.6%, which is one tenth off the 50-year low, and the participation rate rose to 63.3%. Average hourly earnings rose 0.2%, resulting in a 3.0% increase year-over year, which is well off the peak of 3.4% from earlier this year. The decline in wage growth is likely due to the quality of the new jobs being created, which is poor. Otherwise this reports reflects a slower but steady rate of economic growth
The Fed cut rates last week for the third time this year to a range of 1.50-1.75%, which it concludes should be enough stimulus to re-accelerate the rate of economic growth from what has been perceived to be another mid-cycle slowdown. I disagree. The problem is that these cuts will do little to encourage businesses to invest. Capital spending has now contracted for two consecutive quarters, and what typically follows contractions in business spending is layoffs. We need to watch unemployment claims and layoff announcements closely, as the monthly jobs reports are backward looking and horribly inaccurate at turning points in the economy.
Fed policy is impacting financial markets, where the stock market indices have achieved new all-time highs, but if we look under the hood of this economy it paints a different picture. Rate cuts will not lead to sustainable economic growth. Instead, they encourage more speculation and risk taking, leading to excessive valuations that ultimately lead to significant spikes in volatility and capital losses. Government and corporate debt has soared during the past decade of near-zero rates, and we must now manage $1 trillion deficits in the years ahead. This debt accumulation has simply stolen future demand, and it will slow growth moving forward.
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Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.