US ISM Non-Manufacturing PMI November Preview: Manufacturing indicates lower

The Institute for Supply Management (ISM) will release its Non-Manufacturing Purchasing Managers Index (PMI) for November at 15:00 GMT, 10:00 EST, December 4^th.

Forecast

Services PMI is projected to slip to 54.5 in November from 54.7 in October.   The business activity index was 57 in October up from 55.2 in September.  Employment was 53.7 last month and 50.4 in September. New orders were 55.6 in October and 53.7 in September.

US Economy

Economic growth has declined by a third in the United States from its 3.1% rate in the first quarter to a 2.05% pace in the middle six months of the year.

The tracking of gross domestic product is generally divided into four categories: consumer spending or consumption, business investment, government expenditures and net international trade.

The primary culprit this year for the slide in GDP has been the collapse of business spending and investment as the US-China trade war has dragged on. Businesses, particularly in the manufacturing sector have seen new orders vanish and executives have become increasingly defensive about spending until the conclusion of the trade dispute is at hand.    

ISM business outlook

Sentiments in the manufacturing and service sectors have decreased sharply since they both topped out at 60.8 in 2018-services in September and manufacturing in August.  

Confidence among factory managers fell below the 50 expansion contraction division in August and has remained so for four months though rising from the 47.8 September bottom to 48.3 in October and 48.1 in November. The new orders, employment and new export orders indexes also bounced in October, export orders to 50.4, but all dropped back in November and were in contraction.

Services have a similar history though the far larger sector, about 85% of US GDP has steered clear of recession. The low has been 52.6 in September followed by an improvement to 54.7 that is expected to moderate to 54.5 in November.  

Several reading at or near the bottom of a business cycle are not uncommon and it is as yet unclear whether September will be the low for this downturn.

Business and consumer spending

Retail sales have maintained a healthy aspect for the past year as household spending has been supported by a solid labor market and rising wages.  The sales control group which the Bureau of Economic Analysis employs in its GDP calculation has averaged a 0.433% gain for the past six months.

Reuters

In contrast the durable goods class non-defense capital goods ex-aircraft, a common analog for business spending, has been falling for the past year.  The 12-month moving average had dropped from 0.758% in July 2018 to 0.192% in September after investment was negative in August and September. October’s surprise increase of 1.2%, -0.3% had been forecast, was the largest gain since June and raised the average to 0.25%.

Reuters

Conclusion

The three-way division in the US economy between a generally happy and expansive consumer, a worried and recessionary manufacturing sector and active but slowing service industries is understandable given the circumstances but probably untenable in the long run.

The service sector is largely domestic and it has been the prime beneficiary of the largess of the labor market. When households are employed and wages are rising the surplus adds to consumption.

Equites and the dollar have prospered and all markets have presumed that the ‘phase one’ trade deal between the US and China would sooner or later become reality.  Credit yields have followed the assumption higher as has the Fed with its newly minted neutral rate policy last month.

That assumption is being put to the test this week as US President Donald Trump has questioned whether a trade deal considered after the 2020 election might produce better results.  

Equities fell precipitously on Tuesday as have Treasury yields with the generic 10-year losing 11 basis points to 1.71% (3:00 pm EST) and the 2-year shedding 7 points to 1.53%, (3:00 pm EST). The dollar was trading near a two week low against the yen and a one month bottom versus the euro.

The November PMI services survey could not have captured these new trade misgivings but the lack of progress may be behind the poor performance in the November manufacturing indexes.  Expectations for the service sector must necessarily have weakened as manufacturing has faltered.

 If the services PMI is below forecast equites, bond yields and the dollar will pay the penalty. If the result is better than anticipated the impact will be negligible, it will not be enough to counter the recent spate of bad news.