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ISM Data and Old Recoveries - March 5, 2019

Manufacturing vs. Non-Manufacturing

February ISM Non-Manufacturing data was released today and there were a few surprises. The overall Index beat by roughly three sigma and both the New Orders Index and Business Activity Index increased by 5% or more. The jump in New Orders came as “no industry reported contraction in February” and only Retail Trade reported a decrease in activity. “Respondents are concerned about the uncertainty of tariffs, capacity constraints and employment resources; however, they remain mostly optimistic about overall business conditions and the economy”.

Manufacturing proved less ebullient. February’s ISM Manufacturing PMI missed expectations as New Orders, Production, and Employment decreased, though they remained above the contraction threshold. Timothy Fiore, Chair of the ISM Business Survey Committee, said that demand and output were notable, “although both were softer than the prior month” and said, “inputs continue to reflect an easing business environment”. The WSJ provided additional color in “More Americans Are Back at Work Making Stuff”. Chip Cutter highlighted not only the strong growth in manufacturing employment but also how the sector is changing with increased automation and tight labor markets. These trends should help boost wages and labor’s share, but time will tell if they can emerge unscathed through the trade-uncertainty storm.

 “It’s a myth that expansions die of old age”

 This month marks the 10th anniversary of the 2009 low in the S&P 500. With the recovery growing long in the tooth, many commentators are asking if we are “due” for a recession. According to a recent article from the St Louis Fed, there’s no reason to be worried. In “Is the U.S. Economic Expansion Due to End?”, Michael McCracken explains that while there was an argument to be made that old expansions were increasingly fragile, “the age of an expansion has been much less of a factor in bringing about its end since World War II”. Rather, “now that expansions don’t seem to be dying of old age anymore, gauging the health of the economy through... other measures is much more useful”.

As far as which measures to watch, the St Louis Fed also had an answer in February. In “Predicting Recessions: Which Signals Are More Accurate”, Don Schlagenhauf and Ryan Mather look at using Yield Curve Inversion and declines in Housing Starts for predicting recessions. The short answer is their predictive power depends. While Housing Starts are a better predictor in the short term, “as the forecast horizon lengthens... the yield curve eventually becomes a more accurate forecaster.” They conclude that “both predictors are significantly better than random chance” and point out that “never in our sample... did a recession occur that was not predicted by at least one of the signals in the previous six months”.