Sticking with the sentiment factor for the economy, or at least in mostly unhelpful measurements for it, it is interesting that most of the manufacturing and business sentiment indices are failing to find the FOMC’s “transitory” economic nature. The most helpful so far has been the Chicago Business Barometer, but that merely ticked above 50 after finding two months at five and a half year lows. Even the Markit National PMI has run into “confounding” weakness in sharp contrast to what economists have still been insisting about the employment report and now the FOMC is using as it clearly grasps for straws.
While only a handful of these indications are in “contraction” that doesn’t mean what everyone takes it to mean. After all, the Chicago Business Barometer rebounded all the way to 57 (from 44.5) in August 2008 which did not really suggest the manufacturing economy was growing again, as was/is the main interpretation, but only that the economy got less worse and only temporarily. As late as February 2012, the overall index was 64 but that didn’t indicate a rapid expansion or even the future growth path with the 2012 slowdown already under way by that point.
The usefulness, therefore, of these sentiment indices is quite limited so any interest in them is as a flock of birds – when they all change together and at once it might be significant regardless of the individual readings.
Manufacturers reported their weakest growth since the start of 2014 in May, with the survey results adding to fears that the strong dollar is weighing on the US economy and hitting corporate earnings. Although falling only modestly, export sales have now dipped for two straight months, something not seen for two years and a far cry from the solid export performance seen this time last year. Overall order books are consequently growing at the slowest rate seen since the start of last year.
The weaker order book trend doesn’t appear to have affected hiring, at least not yet, with job creation picking up in May. However, unless production growth revives there is a worry that payroll growth will slow as companies seek to boost productivity.
That is indeed the greatest worry, that if consumers are already in recession and we have yet to find or see the most strident contractionary trends and processes carried out, what might that mean for the depths of potential economic behavior even in the near term? Nothing good, which is why the entire “herd” of sentiment changing is at least somewhat noteworthy.
The Philadelphia Fed reported on Thursday its manufacturing index fell to a weaker-than-expected reading of 6.7 in May from 7.5 in April, marking the fifth straight month of a modest single-digit growth.
Any reading above zero indicates improving conditions, but details were soft. The average workweek dropped to negative 5.6 from 3.4 in the prior month.
In addition, the Kansas City Fed reported the worst figures since the Great Recession, and some that were actually far too similar to even the collapse phase itself. Almost all of the comments included with the report referenced a sharp slowdown just recently, not in the winter months. The new orders subindex was -19 with the backlog of new orders all way down to -21, both only a few points “better” than the worst months of the Great Recession.
Production fell most deeply in energy-heavy Oklahoma and New Mexico, as the falling price of oil has caused companies in that sector to cut spending and lay off employees.
But production was also down in most other states in the region, with the sharpest declines in durable goods manufacturing, including aircraft production and metals and machinery production. Several nondurable goods plants also reported sluggish activity, particularly for plastics and food production.
Oil or not, that is another of the worrisome recession trends that has yet to show up. Recessions are the accumulation of a broad distribution negative factors, and we are seeing both the lengthening of these downward trends and wide geographical distribution beyond the oil patch. Even still, the oil decline hasn’t so far found its way into the wider economy, just as the “rising dollar” isn’t a sizable presence at this point as a corporate backlash. Combined, those would be very powerful forces that would undoubtedly knock the overall economy further back than it already is – and maybe even disastrously so. What might consumer spending and “demand” look like with the atrocious baseline already established in 2015 but then including these further erosions?
If there is any value in interpreting these notions of sentiment, then it is as a suggestion some of the “traditional” recessionary forces might just now finally be gathering steam. The FOMC can decry the state of GDP fakery and pillow the high state of consumer sentiment, but American businesses actually work and run in the real world outside the academy where such notions are beyond worthless. In other words, we are no longer looking for that rebound but rather what might be below.
