Weak Manufacturing ISM PMI Sends Down Q4 GDP Growth Nowcast

Quick Q3 GDP Review: No Negative Growth

A big story in the past few weeks has been that 2H 2019 GDP growth isn’t as bad as was feared in October. Real final sales growth should still be mediocre, but headline GDP growth isn’t close to going negative. You don’t need to see negative GDP growth for there to be a recession. But with long run growth estimates slightly below 2%, it’s unlikely for there to be a recession without negative growth. 

If that’s the case, there is almost no chance of a recession in 2019. The only way there would be a recession is if everything we know is wrong. That can’t be your base case scenario. It probably shouldn’t even be your bearish case scenario. Bearish case is probably that growth falters further in 2020. And that inventory investments and positive net exports don’t save headline growth.

This brings me to last week’s Q3 GDP growth revision. Growth was revised from 1.9% to 2.1%. Positive revision mostly wasn’t indicative of a stronger economy. However, if this was a recession, a positive revision to inventory investments wouldn’t keep the economy from negative growth. The consumer would be weak. You can’t have a strong consumer in a recession. 4 basis points of the revision was driven by consumption and 22 basis points was driven by inventories. 

Obviously, this doesn’t mean the consumer was weak though. Consumption growth was 2.9%. You don’t see such high growth in recessions. Furthermore, Oxford Economics sees 1.9% GDP growth in Q4. On the other hand, the Atlanta Fed’s Q4 Nowcast fell after its net exports related bump. Even with this update, it’s not close to negative which supports my point that there won’t be negative growth in Q3 or Q4.

End Of GM Strike Boosts Chicago Fed Barometer

October Chicago Business Barometer was very weak because of the GM strike. It improved in November. The economy has been weak, but not as weak as the Chicago PMI showed. Now we have a report closer to reality. November PMI rose 3.1 points to 46.3 which is a 2 month high. It’s interesting that supplier deliveries had the biggest decline, because it rose in the ISM report as I will get to later. 

Production index fell to 42.3. New orders rose 12.5 points to 49.4. This is much more accurate than October. Backlogs index rose from 33.1 to 45. Inventories fell 8.7% to 43. Employment reading fell 0.2 to 49.6. Supplier deliveries index fell to 50.2 which is the weakest reading since June 2016. Prices index fell to 53.5 which is the lowest reading since April.

Richmond Fed Manufacturing Index Falls

Richmond Fed manufacturing report was weak. It fell from 8 to -1. As you can see from the chart below, it’s much more volatile than annual GDP growth. But its trend is correlated with GDP growth. Shipments index fell from 4 to -2. 

Volume of new orders index fell from 7 to -3. On the positive side, expected shipments and local business conditions rose from 24 and 12 to 31 and 16. Expected new orders and capex indexes fell from 33 and 7 to 30 and 4.

Weak November ISM Manufacturing PMI

ISM manufacturing index drove stocks lower even though the Markit PMI improved. Traders always follow the ISM report closer even though the Markit report has a greater sample size and includes small, medium, and large firms while the ISM report just includes large firms.

As you can see in the chart below, the November ISM PMI was 48.1 which fell from 48.3 and missed the consensus of 49.4. This PMI was below the prediction of the average of the 5 regional Fed manufacturing surveys. It is consistent with 1.5% GDP growth. That growth rate is slightly above the Atlanta Fed’s latest Nowcast. 

Specifically, the Nowcast fell from 1.7% to 1.3%. Predictions for real personal consumption expenditures growth and real gross private domestic investment growth fell from 2% and -1.7% to 1.8% and -2.7%. This update includes the ISM report and the construction report.  

ISM new orders index fell 1.9 to 47.2. That’s bad news for core capital goods orders excluding aircrafts because new orders pushed forward by 3 months are correlated with core capital goods orders growth. Of the 18 manufacturing industries, 5 reported growth in new orders and 12 reported a decline in new orders. 

Production index rose 2.9 points to 49.1 and the employment index fell 1.1 to 46.6. Only the supplier deliveries index was above 50 as it was up 2.5 points to 52. Remember, the Chicago index was above 50, but fell sharply. Unfortunately, a PMI above 50 means deliveries were slower. 11.3% of firms reported slower deliveries and 8% had faster deliveries.

In the comments section, 3 of 10 quotes mentioned tariffs. A fabricated metal products firm stated, “The order book continues to shrink below our forecast levels. We’re unsure at this point how much of the slowdown is tied to certain events [like the General Motors strike], year-end inventory reductions by customers, or a worsening economy. We don't expect clarity on this until early 2020, when we expect to either see restocking orders [a good sign] or not [a bad sign].”

Conclusion

Atlanta Fed GDP Nowcast is too negative likely because the ISM PMI was too negative. ISM PMI was below the average of the 5 regional Fed reports and the Markit PMI. Markit PMI is usually below the ISM PMI. 

This was a record high positive difference between the Markit PMI and the ISM PMI. I don’t see Q4 GDP growth coming in below 1%. That supports the thesis that neither Q3 nor Q4 will have negative GDP growth. 

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