We got an influx of data in the last week, but unfortunately none of it was particularly good. Manufacturing remains in contraction, factory orders continue to contract, and — most surprisingly — the services sector entered a contraction, with ISM’s non-manufacturing PMI posting a decline for the first time since last June. The services reading may be a one-month blip (as it was last year), so we will watch closely for next month’s reading to see whether a trend is forming.
Job figures also posted last week. On the upside, the unemployment rate held steady at 4.2%, but that wasn’t because unemployed people are finding jobs, it was because some 625,000 people left the labor force. Employers are still reluctant to lay off workers, which is good, but it is beginning to feel that the larbor market is on a knife’s edge.
This week we see all-important inflation data, which will set the stage for the Fed meeting coming next week. Markets do not expect the Fed to cut rates, but investors will be listenting intently to Powell’s press conference for signs of what the Fed is thinking the path of rates may be through the end of the year — especially as economic data affected by tariffs has begun to post.
Overall, I am re-emphasizing my cautious view. I realize that this downward economic trend has been in slow-motion. Admittedly, I feel a bit like a Chicken Little. But, I am committed to reading the data for what it says, and while markets have certainly bounced back from their low, the economic data continues to worsen. At some point, prices catch up to the data. Therefore, in my view, downside risk looms larger than upside risk in our current environment. As the data changes, so will my view.
Chart of the Week
The Institute for Supply Management produces two indexes: their manufacturing index and their non-manufacturing index (which basically covers the services sector). For both of these figures, readings below 50 indicate fewer orders expected, while readings above 50 indicate growing orders. The manufacturing figure is somewhat volatile, and because manufacturing is only about 25% of the US economy, it is not uncommon to see a contraciton there without a larger economic contraction. Services, however, represent some 70% of the US economy. Typically, when services begin to meaningfully contract, a recession is not far behind.
Last week’s contraction in services, if part of a larger trend, is concerning becuase both services and manufacturing would be in contraction. That is, effectively, the entirety of the US economy. Therefore, next month’s figures will be very important to keep an eye on.
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