MacroEconomic Musings

June 2nd, 2016 1:49 pm | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securities:

I thought it might be helpful to weigh in on  the events of the last day and a half, when I was traveling.  There were several interesting developments.

The May ISM manufacturing gauge improved by half a point to 51.3, the third straight reading somewhat above 50 after 5 straight readings below the break-even mark.  It was an unusual set of results.  The new orders gauge held strong at 55.7, but the production measure cooled from 54.2 to 52.6 and the employment index was steady just below 50 yet again.  The supplier deliveries component shot up by 5 points to 54.1, the highest reading since 2014.  It was this component that made the difference between a rise in the headline figure and a decline.  Meanwhile, the inventories index inched lower to 45.0, the 11th straight month that manufacturers have cut raw materials inventories.  The ISM spokesman noted that this reflects a “very, very conservative inventories policy” and was likely responsible for the difficulty that suppliers had in filling their customers’ orders in a timely manner.  At the same time, purchasing managers’ assessments of their customers’ inventories shifted higher.  This gauge moved to 50.0, up dramatically from 46.0 in April.  So, manufacturers are holding skimpy raw materials inventories, making it difficult for them to fulfill their customers’ orders (which have been robust since March).  This may explain the slippage in the production gauge.  Finally, the prices index jumped to 63.5, the highest reading since 2011, and 18 commodities were listed up in price vs. only 1 that was reported down in price.  The uptrend in commodity prices makes the ongoing drops in manufacturers’ raw materials inventories all the more puzzling, as one might expect firms to stock up on raw materials when their prices are still low but rising.  In any case, the broad picture is that the headline gauge is lackluster but not falling, and the best news is that the new orders gauge is leading the way, which should generate additional strength going forward.  And, by the way, May was another instance where it paid to ignore the noisy regional survey results.  Many economists lowered their ISM estimates due to soft regional figures, much to their chagrin as it turns out.

Construction spending for April was disappointing, falling considerably.  I remain quite optimistic on the housing sector, but nonresidential building has been quite weak and took a tumble in April.  In addition, the oil and gas rig count data point to yet another sizable drop in mining activity (which is a component of business investment in structures) in Q2.  Thus, I look for another steep drop in the “nonresidential structures” piece of GDP in the current quarter.  Likewise, public sector construction outlays were soft in April, which led me to shave my estimate for state and local government expenditures in Q2.  All in, I lowered my Q2 GDP calculation all the way to 2.3%, with the gap between strong household sector activity (consumer spending and housing) and weakness on the business side (business investment and exports) widening even further.  The revisions to the construction spending data did point to an ever so slight upward adjustment to the Q1 GDP tracking estimate, from +0.8% to +0.9%.

Speaking of the consumer, unit auto sales in May came in exactly in line with my expectation of a 17.4 million selling rate.  This was up slightly from April and adds to the case for a robust Q2 performance from the consumer.

The Beige Book was mostly nondescript, as always, but the one notable development was that most Fed Districts reported tight labor markets and a modest pickup in wages.  Most Districts also reported that “price pressures grew slightly,” the first time I can remember that description in this expansion.

This morning, initial jobless claims were essentially steady at 267,000 in the latest week and seem to be settling out near the year-to-date average.

There was some speculation about the announcement of Chair Yellen’s semi-annual monetary policy testimony for June 21-22.  This is several weeks earlier than normal.  Unlike the choice of June 6 for her big policy speech, the scheduling of Congressional testimony is not entirely of her choosing, so I think it is risky to read too much into this.  Congress is leaving town for the summer a couple of weeks earlier than normal for the party conventions, which is a new development (in the past, even in election years, Congress did not recess until early August).  So, this may be why Yellen’s appearance is so early.  At the same time, the Senate does not leave town until July 15, so there was certainly ample time to schedule it later.  I am not reading too much into the timing.  We should find out most of what we need to know from Yellen on Monday.

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