June Manufacturing Slowdown Is Highly Likely

June Manufacturing - Markit Sees 1.4% Q2 GDP Growth

Before getting into June Manufacturing, let's discuss Markit reports. Markit expects Q2 GDP growth to be 1.4%. That’s with PMI data from the first 2.5 months of Q2. Once we get the final June Markit PMI report we will know Markit’s complete estimate. 

Obviously, having about 11 weeks of data in the books and just 2 weeks outstanding means it’s highly likely the final estimate will be very close to 1.4%. I see no reason for economic activity or sentiment to improve in late June. We won’t know if the G-20 summit meetings between Presidents Trump and Xi went well until the end of this week/month.

St. Louis, Atlanta, & NY Fed Estimates

June Manufacturing - Now let’s look at the regional Fed GDP Nowcasts. The usually optimistic St. Louis Fed Nowcast expects 3.26% growth. Since Q2 2013, this Nowcast has only predicted below 2% growth twice (final estimate). It has predicted above 4% growth three times. 

Markit and Cass Freight reports would be wildly inaccurate if this level of growth was hit. Usually the advanced GDP report reaffirms what we already knew about the economy because the data comes out late. I’d need to rethink most of what I know if growth ends up 3% or higher.  Q2 growth probably won't be helped by inventory investment and trade the way Q1 growth was helped. Meaning, if Q2 growth comes in high, it won’t be a phony number like Q1.

Also, Atlanta Fed Nowcast is at 2%. Residential construction report knocked it down 0.1%. Its update cadence is based on when reports come out rather than being weekly. That makes more sense because some weeks there isn’t much new data and when new data comes out, this is the first to add it to its model. 

Its next update is on Wednesday in which it will add in the advanced economic indicators and the advanced durable goods report to its estimate. The most important reports this week are new home sales, durable goods orders, pending home sales, and personal income and outlays.

June Manufacturing - There were only 3 reports last week that impacted the NY Fed Nowcast. 

Q2 Nowcast increased 3 basis points to 1.39%. It was hurt 7 basis points by the regional Fed manufacturing reports and helped 6 basis points by the housing data. That’s different from the Atlanta Fed report which was hurt 0.1% by the housing data. This 1.39% estimate is towards the low end of the NY Fed’s Q2 2019 growth predictions.

Q3 Nowcast fell dramatically from 1.7% to 1.29%. A terrible Empire Fed manufacturing report sent it down 45 basis points. Taking into account that the NY Fed is usually bearish doesn’t make this weak estimate look good as it would be bad to see Q3 growth similar to Q2. 

However, weak Q3 growth wouldn’t be surprising because the ECRI leading index signaled this weakness 6 months ago.

Oxford Economics Also Sees Slowdown

June Manufacturing - As you can see from the chart below, Oxford Economics sees a big decline in GDP growth in 2019 versus 2018. With less of a fiscal stimulus, tariffs, and a cyclical slowdown we should see below trend growth. Fed sees longer run GDP growth of 1.9%, but that’s just an estimate. It’s fair to say long run growth is higher than 2019 growth. That is, no matter what it ends up being, due to these negative catalysts. 

Long run growth is probably somewhere between last year’s rate and this year’s rate. 2020 growth is projected to fall below 2%, but that’s far from a disaster. A mild slowdown is probably the best case scenario as it means the economy avoids a recession. Annual GDP growth doesn’t need to be negative for there to be a recession. But 2016 had 1.57% growth and there wasn’t a recession. 

Unless growth crashes to the negatives and then spikes back up severely, it’s very unlikely we see a recession in 2020. Especially if annual growth is about 1.9%.

This growth is the best case scenario. Coming off a big burst in growth and a fiscal stimulus and landing at the long run average is quite good. 2 year stacked growth rate will be solid this year if the economy growths about 2%. 

Oxford Economics expects more rate cuts than the Fed sees, but less than the market sees.

June Manufacturing - Current Dallas Fed Data OK, But Expectations Weak

Current June Dallas Fed manufacturing data is closer to the Philly Fed index than the Empire Fed index. Iit wasn’t a disaster, but wasn’t great either. 

As you can see from the chart below, the general activity index fell from -5.3 to -12.1 which missed estimates for -1 and the low end of the estimate range which was -6.4. However, the production index was up from 6.3 to 8.9. Also, the new orders index increased from 2.4 to 3.7. On the other hand, the growth rate of orders index cratered 7.8 points to -6.7. 

Similar to the Philly Fed index, there was a bottleneck because of trade tensions as the unfilled orders index increased 5 points and the delivery time index fell 6.8 points.

6 month expectations index was more like the Empire Fed reading as it was very bad. The production index fell 11.3 points to 25.2. The new orders index fell 12.9 points to 22.3. Growth rate of orders index fell 8.1 points to 17.2. In the current report, outlook index fell 3.8 points to -5.5 and outlook uncertainty index was up 5.5 points to 21.6.

Let’s look at the quotes to see why firms are uncertain

June Manufacturing - A machinery manufacturing company stated, “Uncertainty stifles hiring, expansion and capital expenditures. Threats of tariffs cause uncertainty. The businesses lobbying for tariffs are incapable of competing on a level playing field.” 

Another machinery company stated, “It is hard to quantify, but we’ve taken steps to prepare for a slowdown even though we’re not seeing it yet. We are still quoting many jobs, but we are receiving feedback that business development is taking hard looks at everything now.” 

The only thing to fear is fear itself. Tariffs are causing fear. If the trade war ended this month, this report would see a return to optimism in July. 

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