US economy: Cooling not collapsing
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Article Type
Insights
Topic
Macro
Published
June 04, 2024
Read time
3 mins
Author
Frank Rybinski, CFA
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Manufacturing: Still in the doldrums

 

The latest report from the Institute for Supply Management (ISM) showed the manufacturing industry continues to contract. Mays reading of 48.7 means that only 1 of 20 readings since September 2022 have been north of 50. (Readings below 50 indicate a slowdown in the sector, while readings above 50 show it is growing).

 

Institute for Supply Management
Purchasing managers' index

 

Institute for Supply Management Purchasing managers' index

 

Sources: Institute for Supply Management, Haver Analytics. Data as of June 2024.

 

New orders sag

 

Still, while the report was not surprising, the forward-looking sub-indices imply that there's not much improvement in the pipeline. For instance, while production was roughly flat in May (coming in at 50.2), it was due to factories continuing to work through backlogs (42.4). Meanwhile, the indexs new orders reading of 45.4 implies that manufacturing activity will likely continue to slow as we head into the second half of 2024.

 

Institute for Supply Management

New orders index

 

Institute for Supply Management New orders index

 

Sources: Institute for Supply Management, Haver Analytics. Data as of June 2024.

 

Still, the silver lining in terms of GDP may be the fact that manufacturing hasnt been contributing much to the countrys overall economic growth recently. So, unless the headline manufacturing ISM reading really sags (i.e., falls into the low 40s), its not likely to be a major drag on overall GDP.

 

Interest rates matter

 

On the construction front, a separate report from the Census Bureau showed that private construction continues to cool. US construction spending came in at a seasonally adjusted $2.099 trillion in April, down -0.1% from March. Year to date, private construction was down -1.0% on an annualized basis. Its also worth noting that these numbers are nominal, so the contraction is even larger in real terms.

 

The main area of growth continues to be technology, which is supported by government subsidies and incentives. In a nutshell, if the government isnt subsidizing it, its not growing. But technology only accounts for 6% of all construction spending, so growth in technology construction isnt fully able to offset the declines in the much larger components.

 

The report underscores the constant operating pressures that interest-rate sensitive activities like construction continue to be under from higher rates. And that pressure is likely to slowly increase the longer higher interest rates are in place.

 

Total construction minus tech construction

Change period to period, in millions $, SAAR

 

Total construction minus tech construction Change period to period, in millions $, SAAR

 

Sources: US Census Bureau, Haver Analytics. Data as of June 2024.

 

Total construction minus tech construction

In millions $, SAAR

 

Total construction minus tech construction In millions $, SAAR

 

Sources: US Census Bureau, Haver Analytics. Data as of June 2024.

Important Information

Author

Frank Rybinski, CFA
Head of Macro Strategy

Frank Rybinski, CFA, is head of macro strategy responsible for guiding the firm’s global macroeconomic view as it pertains to tactical and strategic asset allocation.

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US economy: Cooling not collapsing
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