The ISM manufacturing report was a disaster from every angle, especially employment , production, and backlogs. Employment reading worst since June 2020.
Please consider the July 2024 Manufacturing ISM® Report On Business® emphasis mine.
The U.S. manufacturing sector contracted for the fourth consecutive month in July, as the Manufacturing PMI® registered 46.8 percent, down 1.7 percentage points compared to June’s reading of 48.5 percent. “After breaking a 16-month streak of contraction by expanding in March, the manufacturing sector has contracted the last four months, and at a faster rate in July.
Of the five subindexes that directly factor into the Manufacturing PMI®, only one (Supplier Deliveries) was in expansion territory, up from zero in June. The New Orders Index remained in contraction and moved downward in July.
None of the six biggest manufacturing industries registered growth,” says Fiore. A reading above 50 percent indicates that the manufacturing sector is generally expanding; below 50 percent indicates that it is generally contracting.
Production
The Production Index continued in contraction territory in July, registering 45.9 percent, 2.6 percentage points lower than the June reading of 48.5 percent. None of the six largest manufacturing sectors reported increased production. The index recorded its lowest performance since May 2020, when it registered 34.2 percent. “Panelists’ companies significantly reduced output levels compared to June. New order rates remain weak, and backlog levels continue to decline. Companies continue to avoid investing in inventory due to the current economic uncertainty,” says Fiore. An index above 52.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
Employment
ISM®’s Employment Index registered 43.4 percent in July, 5.9 percentage points lower than the June reading of 49.3 percent. The index recorded its lowest level since a reading of 42 percent in June 2020. “The index contracted for the second consecutive month after an expansion in May, which broke a seven-month streak of contraction. None of the six big manufacturing sectors expanded employment in July. Respondents’ companies are continuing to reduce head counts through layoffs, attrition and hiring freezes. Panelists’ comments in July indicated a notable increase in staff reductions compared to June, supported by the approximately 1-to-1.8 ratio of hiring versus head-count reduction comments,” says Fiore. An Employment Index above 50.3 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
Order Backlogs
ISM®’s Backlog of Orders Index registered 41.7 percent, the same reading as in June, indicating order backlogs contracted for the 22nd consecutive month after a 27-month period of expansion. For the second consecutive month, the index recorded its lowest reading since November 2023, when it registered 39.3 percent. None of the six largest manufacturing industries reported expanded order backlogs in July. “The index remained in contraction in July, as new order rates were insufficient to allow backlogs to grow. After 22 months of backlog contraction, it is believed that order books are now at historically low levels,” says Fiore.
Respondent Comments
- “Business is relatively flat — the same volume, but smaller orders.” [Chemical Products]
- “Demand continued to soften into the second half of the year. Supply chain pipelines and inventories remain full, reducing the need for overtime. Geopolitical issues between China and Taiwan as well as the election in November remain weighing concerns.” [Transportation Equipment]
- “Even though we are used to a seasonal reduction in business over the summer, consumer behavior is changing more than normal. Sales are lighter, and customer orders are coming in under forecasts. It seems consumers are starting to pull back on spending.” [Food, Beverage & Tobacco Products]
- “Availability of parts is good, with small exceptions of missing materials here and there. Ordering is still well below typical levels as we continue to burn down inventory of raw goods, with ‘normal’ ordering trends expected to return sometime in the second half of 2024.” [Computer & Electronic Products]
- “It seems that the economy is slowing down significantly. The number of sales calls received from new suppliers is increasing significantly. Our own order backlog is also diminishing. We are hoping for an increase in customer demand, or we will possibly need to make organizational changes.” [Machinery]
- “Unfortunately, our business is experiencing the sharpest decline in order levels in a year. We were well below our budget target in June; as a result, it was the first month this year that we had negative net income.” [Fabricated Metal Products]
- “Business is slowing, and we are taking cost actions.” [Electrical Equipment, Appliances & Components]
- “Some markets that are usually unwavering are showing weakness. Weather is the common factor, but only so much.” [Nonmetallic Mineral Products]
- “Our sales forecast for July and August are slow, but we’re making every attempt to remedy that situation. Our medical end-user customers continue to meet their forecasts, which is promising.” [Textile Mills]
- “Elevated financing costs have dampened demand for residential investment. This has reduced our need for component products and inventory.” [Wood Products]
Bloomberg Econoday Consensus
The Bloomberg Econonday economists’ consensus was 48.8, an increase from 48.6 in June.
ISM reported 46.8, lower than every estimate. The Econoday range was 48.0 to 50.1.
Production, Employment, Backlogs
Those three key components are related.
To smooth out fluctuations in orders, manufacturers will turn to backlogs.
Once backlogs are depressed, manufacturers will reduce hours and production.
If orders still decline, manufacturers need to reduce headcount, and that’s where we are now.
New orders don’t seem to be declining all that fast. But one respondent’s comment may be telling, “the same volume, but smaller orders”.
Orders are still coming in, but the associated work is decreasing. There was not one positive respondent comment in the bunch.
Rising prices is a stagflation signal. But that won’t last long.
Small Business Employment Growth Is Now Negative
Yesterday, I commented Small Business Employment Growth Is Now Negative (and What It Means)
ADP data shows year-over-year payroll growth is negative 88,000 for small corporations sized 20-49. Trends are negative in all but very large corporations.
On July 26, I commented Expect the BLS to Revise Job Growth Down by 730,000 in 2023, More This Year
At the heart of these revisions is a horribly flawed birth-death model used by the BLS. My calculation closely matches an estimate by Bloomberg’s chief Economist.
In addition to the birth-death model, or perhaps explaining the birth-death model errors, small business employment is declining fast.
“All Hell Breaks Loose” In the Next Few Months as Recession Bites
On July 25, I commented “All Hell Breaks Loose” In the Next Few Months as Recession Bites
Two of us are still adamant that a recession has started. The other is Danielle DiMartino Booth, in her best video yet. Please take a look.
Recession is here, World War next, inflation
Stellantis (Chrysler) is looking to reduce headcount by 1000 people. Whispers are coming out of Intel that they will be laying off 1K to 10K. What is significant about Intel is they are a MAJOR player in the semiconductor / microprocessor industry. Recessions hurt incumbents.
Make that 17K people being let go from Intel AND the dividend is being suspended after a swing from $1.5B profit last quarter to $1.6B loss this quarter. A $3B drop in 3 months sounds like Intel’s customers are hurting quite a bit.
Building a snowball
Covid bucks induce inflation, consumers cut back but orders continue for production/imports. A temporary boost in employment and higher wages after Covid as people are reluctant to go back to work, However, it was always transitory. At higher prices, consumers are tapped out and retail sales decline, inventories draw down, production slows, employment drops in some categories–NOT all. Less income, more credit borrowed, and still less consumption/retail sales. We see regional variations in housing demand. A few store closings. Low hanging fruit always go first. And the next bank to fail will be???
The snowball is rolling downhill, slowly, but gathering momentum.
Now, try to build an econometric model that includes the above and is consistently right. How about 51% right?
Economists are trained on Keynesian mechanics. It’s math and scientific method–statistics crunching data–what is known as atomistic thinking… Breaking the problem down to components without understanding the big picture–the myriad complex relationships between the parts of the economy.
That takes holistic thinking–which is in short supply in the age of science. Let’s not forget the great unknowns like $36 Trillion in Fed debt, the massive overpricing of stocks, a quadrillion+ of derivatives…
You end up with simplistic rules of thumb. I suspect behavioral effects are the real driver of the business cycle, especially this time around with Pin Head and
Big Mouth.
A few months sounds about right to me, too.
Economists are like real estate agents. Almost always too optimistic, unless they are equally ridiculous perma-bears. So I look at econometric data and analysis, which is where Mish absolutely shines. The rest, along with 90% of the comments, is whipped cream on dogshit. Anyway, it has been clear all year that the economy is slowing down. Looks like the slowdown is accelerating.
Because of the election connection, I am watching the monthly U3 releases very closely. Employment is a lagging indicator, although I suspect less so over time with the decline of manufacturing and more disaggregation all the time within industries and enterprises.
Mish, if you want to play to your strengths rather than engage in the pointless masturbation of political punditry in Michigan, you might want to examine the degree to which the Us might or might not have become less lagging.
You don’t consider Mish a perma-bear?
I don’t have enough experience here to tell.
I consider him more of a contrarian.
When things are looking / going too good, he’s on the lookout for when things will inevitably turn bad. When things are looking / going too bad, he’s on the lookout for when things will inevitable turn good. This is also why he’s more critical of whomever is in power (Trump 2016-2020 and now Biden 2020-2024).
These types of investors make their big money at the turn by being *just* ahead of the crowd.
That’s not been my experience, it’s more like when things are looking too bad, he’s on the lookout for why it’s about to get a whole lot worse.
Case in point: https://mishtalk.com/economics/is-this-a-stock-market-correction-or-a-resumption-of-the-bear-market/
After a 11% correction in the S&p500, on Octber 27th 2023, he suggests it’s not a correction but the resumption of a bear market. You know what day the stock market bottomed? October 27,2023. The incredible laser precision of this call is quite remarkable. Since that day the market is up 33%, in 10 months. Brutal.
A blow off top
Here’s another beauty: https://mishtalk.com/economics/finally-time-to-short-the-homebuilders-because-it-doesnt-get-any-better/
Yikes, the home builders index up 40% since that call. I never understood how 7% mortgage rates constituted as good as it gets for homebuilders. I bought a bunch. Most are up much more that 40%. Thanks.
To be fair, the alternative investment he always advocates for, gold, is also up about 25% in the last year.
I made a major rotation from technology Mag 7 to boring ole bonds/staples/utilities yesterday.
Mag 7 profit taking is going to be the theme for the rest of 2024.
re: “Rising prices is a stagflation signal. But that won’t last long.”
Stagflation is defined as business stagnation accompanied by inflation. Disinflation is not hitting housing.
I think it’s reasonable to assume that in a rising interest rate and QT environment that there will be a near term correction in house prices – whether that is disinflation or deflation I do not know – due to the decrease in money velocity. My expectation is there may be some strong price corrections – this correlates with the rapid increase in housing inventory this year.
But, over a long period of time I have no doubt you are correct. I believe that the lure of low interest rates and printing money will be too much for politicians looking to buy votes. Sadly this may put us back in an inflationary environment. The bad news this time is I don’t think that monetary policy will fix the many problems that have been caused by bad policies the last few decades.
Stagflation.
We are still bouncing around 0 for CFNAI. This is the widest measure of the overall economy by far. I don’t think a quarter point cut will do anything for most people. The economy just really is settling back to normal levels of activity after a depression followed by a spike. Everyone’s memory is short but the 2010s were effectively a low/slow growth and low inflation environment. That is the norm for a developed economy saddled with over 100% debt to GDP. If people are really interested in fixing the cost of living problem, then there should be no tax breaks for real estate investors — period.
The stock market sure doesn’t like it but the GDPNow model responds with a yawn, 2.5% GDP growth still predicted for the third quarter.
The internal damage done to the economy from loss of purchasing power inflation and subsequent buildup of credit to stay afloat will prevent any quick turn around.
This even if Fed does some emergency cuts, which after just yesterdays J. Powell production is not even on their radar screen. He was asked directly that question by one of the Press members what if Fed had it wrong? He just shrugged it off and said they made their call on what info was currently available.
There is no Lone Ranger to the rescue. Inflation pressure remains elevated and even though Fed gave a nod to employment there is not enough breakdown exhibited as of yet for them to go stimulus.
PMI is a market sentiment index. It is ideal to identify major and intermediate market lows which one then combines with the better managed companies selling at discounts to their financial record to buy. The PMI has called recession 27 of the last 9 recessions and often after the fact for those 9.
I am a buyer of well-managed industrial and energy issues.
They never see it coming, do they. If only Kamala can ride out the clock until November 😉
It’s her only hope.
Kamala rode Willy’s clock as far as she can go.
Ouch.
She can’t ride this out. We’ll have three more months of declining numbers before the election. There will be a significant number of layoffs in the next couple of months.
Weak ISM index only buttresses the justification for a rate cut. It won’t be enough to affect the economy before the election, but a rate cut can be sold as “we’re headed back to (even) better times”. When you control the entire media complex, you get whatever narrative works.
Yesterday pump, squeeze, Mag7 and AI unicorns swirling rainbow ice cream cones from their rear ends … Today, whoops, those economics numbers matter, “We’re all gonna die!” dump. The algos are happy whatever outcome there is, as long as they can amplify and front run. Economics in the end matters to people with jobs, responsibilities, bills to pay, life to live etc.