The Fed should’ve cut rates this week.
I’m just kidding. But that’s what some folks will say in the event the balance of the US macro data between now and the September FOMC meeting looks anything like Thursday’s ISM manufacturing report covering July.
The marquee gauge of factory activity in the US printed a pretty bad miss on the headline. 46.8 looked decidedly rough, and it undershot consensus by a meaningful margin, where that means by a country mile. Economists wanted 49.
ISM manufacturing now sits at the lowest level since November. S&P Global’s gauge was (basically) unchanged in the final reading for July, and likewise sits at multi-month lows.
The ISM headline spent 20 of the past 21 months below the demarcation line separating expansion from contraction. “Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current monetary policy and other conditions,” Tim Fiore said Thursday. “Production execution was down compared to June, likely adding to revenue declines, putting additional pressure on profitability.”
Pretty much every underlying aggregate in the ISM release deteriorated in July from the prior month. The employment gauge dove to 43.4, down almost six points from June.
As the figure shows, that was the worst read on factory employment in the ISM release since June of 2020.
Insult to injury: The prices gauge picked up, printing 52.9.
The ISM anecdotes were uniformly grim. “[W]e are used to a seasonal reduction in business over the summer [but] consumer behavior is changing more than normal,” one panelist told Fiore. “It seems that the economy is slowing down significantly,” said another. “Unfortunately, our business is experiencing the sharpest decline in order levels in a year,” another still.
And on and on. You get the idea.
Editorializing around the S&P Global survey, chief business economist Chris Williamson painted a broadly similar picture, although he suggested price pressures remain relatively subdued. “Business conditions worsened in July as the first fall in new orders since April caused a near-stalling of production,” he said. “Purchasing activity is falling and hiring has slowed amid concerns over weaker-than-anticipated sales.”
Should’ve cut.
ZIRP part deux coming soon to a theater near you! We’ll still have a divided government after November (Dems – House and Presidency, Republicans – Senate), which will lead to gridlock while the economy stalls and the Fed steps in with the cuts.
looking at equity prices 9:30 pacific, i’d have to suggest that bad news = bad news today. Has the lens flipped, and you know all those old sayings, ‘be careful what you wish for …’?
From ISM report
“all six of the largest manufacturing industries — Machinery; Transportation Equipment; Fabricated Metal Products; Food, Beverage & Tobacco Products; Chemical Products; and Computer & Electronic Products — contracted in July . . .
The five manufacturing industries reporting growth in July are: Printing & Related Support Activities; Petroleum & Coal Products; Miscellaneous Manufacturing; Furniture & Related Products; and Nonmetallic Mineral Products.
The 11 industries reporting contraction in July — in the following order — are: Primary Metals; Plastics & Rubber Products; Machinery; Electrical Equipment, Appliances & Components; Transportation Equipment; Fabricated Metal Products; Food, Beverage & Tobacco Products; Wood Products; Paper Products; Chemical Products; and Computer & Electronic Products.”
Well, I guess if the unemployment rate climbs enough to trigger the Sahm rule tomorrow we can expect selling to accelerate. Nothing surprising here really, Fed behind the curve, recession scare, seasonality, geopolitics, election jitters, the only thing surprising is how resilient markets have been so far.
Lots of sale pricing in the consumer area, certainly clothes and non-essentials. And then there’s the big elephant: automobiles. Vehicles are starting to pile up at dealers and EVs are really sucking wind. The pandemic created quite a few wrinkles in ‘the force Luke’ and the unravelling is not going to be smooth. Consumption patterns have all been severely disrupted.
Well, there’s little stopping them from doing an out of cycle “emergency” rate cut if needed anyway, right?
Fed very unlikely to do intra-meeting cut – signals panic/crisis, spooks investors, and 25 bp now or in a month makes no difference
It is puzzling to me that the ISM Manufacturing Index and the Federal Reserve’s Industrial Production Index (link below) are painting quite different pictures.
https://fred.stlouisfed.org/graph/?g=1r9Ha
As I understand it, the former is intended to reflect the latter but be more timely (in ISM series, July is available now, while in Fed series, only June is available).
However, historically ISM PMI has at time diverged significantly from Industrial Production Index. Markit (now SP Global) PMI has also diverged significantly from Industrial Production Index, and the two PMIs have often diverged significantly from each other. See charts on page 3 here https://cdn.ihsmarkit.com/www/pdf/0222/IHS-Markit-vs-ISM-PMI_2018.pdf and also discussion here https://www.spglobal.com/marketintelligence/en/mi/research-analysis/explaining-us-manufacturing-pmi-survey-divergences-Oct19.html
Just eyeballing all those charts, my vague sense is that the PMIs are more volatile than actual Industrial Production and sharp moves up or down in the PMIs should be taken with some salt.