INDICATOR: August Manufacturing Activity and July Construction Spending
KEY DATA: ISM (Manufacturing): +1.8 points; Orders: +6.1 points; Backlogs: +2.8 points/ Construction: +0.1%; Private: +0.6%; Residential: +2.1%
IN A NUTSHELL: “The manufacturing sector is picking up some serious steam and could start pushing housing for the number one driver of growth.”
WHAT IT MEANS: Some of the latest economic numbers are truly amazing. The housing sector is flat out flying and now it looks like manufacturing is beginning to follow the same path. The Institute for Supply Management reported that its index of overall activity rose solidly in August to the highest level in two years. That may not seem like a long time but it was before the pandemic and after the tax cuts, so we are talking real strength. And the good news was not just the headline number: The details were just as strong.
New orders are jumping as the recovery spreads. Even with output ramping up, demand is outstripping the added supply and backlogs are building and inventories are falling. That bodes well for future production. There was just one negative number in the report: Payrolls continue to be cut, though the rate of decline is moderating.
Construction spending edged up in July, but the gain was all in residential activity. Spending on lodging, office, commercial, healthcare, education, religious and amusement and recreational projects were down. It was worrisome to see that government spending on major infrastructure projects such as health care, education, public safety, highways and transportation declined. State and local governments just don’t have the money to invest in their future.
IMPLICATIONS: Can housing and manufacturing keep it up? It has been about a month since the enhanced unemployment checks stopped coming, so we haven’t seen the impact that may be having on consumer spending.
Since there is not much chance that exports, which are way down, will pick up sharply, and given that government spending is being reigned in, we need households to spend like crazy if the economy is to keep the V-shaped recovery going. There are only so many new homes we can build before the market gets out of hand. We know what that leads to.
But today we saw that the private sector is not doing a lot of building, outside of housing, while state and local governments are strapped for cash and are hardly in the mood to spend what they don’t have. I have said since early April that the fourth quarter of this year and the first quarter of next will determine the future condition of the economy.
A second quarter collapse and a third quarter rebound were baked into the cake. I had assume back in the spring that the government’s willingness to keep both households and businesses on welfare would have run out by now, but as usual, I underestimated the willingness of politicians of all stripes to spend when it suits their purposes.
Once we clear the election, it is likely that most of Washington’s handouts to businesses and households will fade away. That is why the fourth quarter and first quarter of next year are so critical.
Without the federal government’s largesse, and with unemployment still likely to be extremely high, the ability to sustain growth will depend upon household and business confidence in the future. So, maybe the most important numbers going forward will be the confidence measures. As for the markets, happy days are still here and as I keep saying, the trend is your friend until it isn’t.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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