> The global economy is slowing very rapidly and the world trade was contracting in June. To anticipate the immediate future on the economic activity, companies’ surveys are key. Next week, the Markit and ISM surveys will be released. On September the 2nd, manufacturing sector surveys for Markit will be out. The ISM will be out on September the 3rd. These number will highlight the short term momentum of the global activity and the future dynamics of world trade.
> On September the 4th the Markit service sector survey will be released and the 5th it will be the ISM survey on services. In the US, the services survey no longer re balance the weakness of the manufacturing sector. The flash estimate for the Markit survey is now below 51. Fragility leading to recession?
> US employment for August will be released on September the 6th. Recent numbers on jobs creation have been revised down (annual revision) leading to a lower dynamics. This change is consistent with the change in trend seen in the JOLTS survey.
> Industrial Orders in Germany for July (September 5) will be another source of information on the strength of the global momentum as this indicator has a profile consistent with the OCDE corporate investment. Recent data show a rapid slowdown. > Recent developments in the Middle East with higher tensions, this week-end, between Israel, Lebanon and the West Bank.
The downward adjustment of the manufacturing sector ISM has continued since the high point of August 2018. The flagship indicator of the US economy must be based on a less volatile and less strong real dynamic. The CFNAI that I take as a reference is calculated as the common trend of 85 indicators of the real economy. There is still room for adjustment and this will happen in view of the deteriorating international environment and the absence of economic policy measures across the Atlantic that could boost growth very quickly. This means that the ISM will cross the 50 level in the coming months and will probably fall below it even if only temporarily.
The decline in the ISM is mainly due to lower order flows and lower delivery pressures.
The ISM index for the manufacturing sector (July 1) will be the main indicator in the coming week. The slowdown in the US business cycle may be confirmed in June.
The US labor market is the other main indicator (July 7). Its dynamics has recently changed as it adjusts to the new business cycle shape.
The Markit indices for the manufacturing sector (July 1) and for the services sector (July 3) will show the risk of a global recession for the manufacturing sector. The hope for the Eurozone is a strong services sector index that will allow an extension of the growth momentum. The Tankan survey in Japan will be out on July 1.
Employment in Germany for June (July 1) and retail sales for May (July 3) will show the possibility of maintaining a robust domestic demand or if it is necessary to have a stronger economic policy to cushion the impact of world trade negative shock on the German economy.
Retail sales in the Euro Area (July 4) for May will be a good proxy on the strength of the internal demand for the Euro zone.
What do I expect as being important next week: 7 points at least Markit and ISM indices in the manufacturing sector (June 3) German Industrial Orders for April (June 6) US employment for May (June 7) Euro Area inflation rate for May (June 4) ECB meeting (June 6) Trade war (no specific date) Inversion of the US yield curve The document is available here What to expect Next Week June 3 – June 7 2019
ISM index dropped: a healthy adjustment. In the USA, the fall of the ISM may reflect a return to a more normal situation? For many months, this indicator for the manufacturing sector was well above the CFNAI index which is a measure of 85 indicators of the economic activity (prepared by the Chicago Fed). This situation, which has been a regular occurrence since 2004, always ends with a sharp and brutal adjustment of the ISM to the CFNAI. The adjustment always takes place in this direction. Finally, the overly optimistic expectations contained in the ISM index adjust to the “real economy” which does not present excessive optimism. This adjustment is rather healthy.
The ISM index for the manufacturing sector is, in August, at its highest since May 2004. It was then at 61.3 versus 61.4 in May 2004.
The reading of this index is puzzling for different reasons
1 – Since 2011, the average growth in the US is 2.2% but the trend was 2.7% between 2000 and 2007. But the ISM index was, on average, higher since 2011 than before the crisis. Its average was 54.1 from January 2011 to August 2018 but only 52.1 from January 2000 to December 2007. A higher ISM index doesn’t not reflect a stronger growth momentum. We can see that also when looking at the manufacturing production index. On the same periods, the annual growth rate was 1.8% from 2000 to 2007 but 1.15% from 2011 to July 2018.
In other words, the index is higher than in the past while growth is lower.
2 – There is a robust index calculated by the Federal Reserve of Chicago. The CFNAI (Chicago Fed National Activity Index) is the synthesis of 85 indicators (industrial production, employment, personal income,….). It’s reading is easy with an average at zero and a standard deviation of one.
The CFNAI is an accurate measure of the business cycle based on observed variables. Usually the two profiles are consistent as the graph shows.
Recent data show a persistent divergence between the two. The CFNAI is close to 0 while the ISM is at a high historical level. It is probably too high giving a wrong signal of the US growth strength.
The synthetic index of the ISM survey in the manufacturing sector crashed in August. It is again below the 50 threshold. We can imagine that the recent improvement was temporary as the index was below 50 from October 2015 to February 2016. The August 2016 level is way below its historical average.
The drop in the ISM index reflects mainly the fragility of the domestic market as the new export orders index is stable above 50. This drop may be temporary but it shows that the American economic is not able to rebound strongly and permanently. That’s worrisome
I’m not sure that the US economy is close to the targets defined by the Federal Reserve and mentioned recently by Janet Yellen and Stan Fisher. We will still have to wait before the Fed hikes its main rate if it does it. Continue reading →