Markit PMI Consistent With Just 1.5% Q3 GDP Growth

Strong Leading Economic Indicators

On an intermediate term basis, the Conference Board leading economic indicators report doesn’t look good, but that’s not the fault of the July monthly reading which was very strong. Specifically, it was up 0.5% monthly which beat estimates for 0.2% growth and met the high end of the consensus range. Plus, the June reading was revised higher from -0.3% to -0.1% growth. July’s reading hit a new record high, which should quell some recession fears. The index has fallen off its record high between 1 month and 20 months before recessions in the past 7 cycles (excluding the early 1980s double dip recession where it never hit a record high).

As I mentioned, it doesn’t look as good in the intermediate term. As you can see from the chart below, the 6 month moving average of the 6 month rate of change of the leading index fell to just 0.4% growth. It has never fallen to negative growth this cycle. Growth goes negative between 2 and 15 months before recessions based on data since 1960. It needs a couple great readings to avoid negative growth in the next couple months. August could be tough because manufacturing is weakening and the stock market has gone through a correction. The S&P 500 is down 1.93% month to date.  

The improvement in the leading indicators report was driven by building permits, jobless claims, and the financial components such as the stock market. The yield spread hurt this index for the 2nd straight month. The yield spread has gone rogue as most reports don’t signal a recession is coming. In the past 6 months, this index is up 0.8% which is a 1.6% annualized increase. That’s about the same growth rate as the previous 6 months. The coincident index is up 0.6% in the past 6 months which is a 1.1% annualized growth rate. That’s half as fast as the previous 6 months which had 1.2% growth. Both the leading and lagging indexes improved quicker than the coincident index. In other words, past growth was quicker than current growth and future growth will be quicker than current growth.

Strong Jobless Claims

Jobless claims helped the leading indicators in July and should help the index in August. In the week of August 17th, jobless claims fell from 221,000 to just 209,000 which was below the consensus for 216,000. The bulls love to cite this strong report, just like the bears love to cite the inverted yield curve. I look at all the data to formulate my macro opinions.

Because a strong reading exited the 4 week moving average, it increased from 214,000 to 214,500, which is still low. Last week, continuing claims rose sharply. This week they fell back down. In the week of August 10th, they fell 54,000 to 1.674 million. The 4 week average fell slightly to 1.697 million. This is the sample week for the monthly employment report. The fact that initial claims were so low is a good sign for the August BLS report. It might show over 100,000 jobs created. It will be released on September 6th.

August Flash PMI Weakens To A 3 Month Low

The August flash Markit PMI composite was weak as the manufacturing sector fell into contractionary territory. Specifically, the composite PMI fell to 50.9 from 52.6 which is a 3 month low. This is consistent with only 1.5% Q3 GDP growth. That’s below the consensus for 2% growth. The services PMI fell from 53 to 50.9 which was a 3 month low as well. In July it seemed like the service sector was vastly outperforming manufacturing, but in this reading the gap closed significantly.

The manufacturing PMI fell from 50.4 to 49.9 which was a 119 month low. Much was made about the fact that it fell below 50, but the sequential decline wasn’t terrible. We already knew manufacturing was contracting because it fell 0.5% yearly in the July industrial production report. The PMI can still be above 50 if the 2nd half of the month shows very slight improvement from the flash reading. The real story from this report is the weakness in services. The manufacturing output index actually improved as it went from 50.5 to 50.6 which is a 2 month high.

Specifics Of The Report

New business growth was the weakest since October 2009 when the calculation first started. The rate of job creation was the weakest since February 2010, which is much different than the very strong jobless claims report. The 1 year business confidence outlook fell for the 7th straight month, hitting a new series low (the series was started in July 2012). Finally, prices paid fell for the first time since the survey began in October 2009. Prices charged fell for the first time in 3.5 years. I wish there was older data to full contextualize how weak this report was.

New business in the service sector was the weakest since March 2016. Backlogs fell for the first time this year. Business expectations for the next year fell to the lowest level since this calculation began. In the manufacturing sector, new business fell for the 2nd time in 4 months. The decline in orders was the worst in 10 years. Export sales fell at the quickest pace since August 2009. The auto sector and weak global growth catalyzed the weakness in this sector. Pre-production inventories fell for the 4th month in a row and stocks of finished goods fell the most since June 2014.

Conclusion

In this article, I discussed the strong monthly growth in the leading indicators index and the strong jobless claims report. The weak Markit flash index was seized by the bears as further evidence of a recession. They must be ignoring that even this weak PMI is consistent with 1.5% GDP growth. It’s still early in the quarter, but it looks like GDP growth will be between 1.7% and 2.2%. The trough of this cyclical decline is likely near especially if there is a trade deal. This is the bears’ best chance at a recession; it doesn’t look like it will happen for them.

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