RECESSION WATCH
Conference Board’s Leading Economic Index Rises Declines in labor markets, residential construction offset by improvements in a majority of index’s 10 components
The Conference Board Leading Economic Index continued its recent string of increases, rising by 0.2% in May, the Conference Board said Thursday.
The index—which takes into account 10 different components, such as new orders and stock prices—came in at 109.5 for last month. It increased 0.4% in April. (…)
In the six-month period ending in May 2018, the leading economic index increased 3.0 percent (about a 6.1 percent annual rate), the same rate of growth as over the previous six months. In addition, the strengths among the leading indicators have remained very widespread.
The Conference Board CEI for the U.S., a measure of current economic activity, also increased in May. The coincident economic index rose 1.0 percent (about a 2.0 percent annual rate) between November 2017 and May 2018, somewhat slower than the growth of 1.2 percent (about a 2.4 percent annual rate) over the previous six months. In addition, the strengths among the coincident indicators have remained very widespread, with all components advancing over the past six months. The lagging economic index continued to increase at a faster rate than the CEI. As a result, the coincident-to-lagging ratio decreased. Meanwhile, real GDP expanded at a 2.2 percent annual rate in the first quarter, after increasing 2.9 percent (annual rate) in the fourth quarter of 2017. [Full notes in PDF]
Still no signs of recession from this good indicator:
Bespoke has a similar view:
BOOM?
So far this cycle, the economy has been ok, not too hot, not too cold. Booming conditions generally require stronger a Fed intervention which generally lead to a bust. Hence the need to monitor whether we are booming or not.
Railroad freight remains very strong:
RBC tracks weekly rail data. YTD: +3%, QTD: +4%, last week: +5%.
- Chemicals are a good barometer of industrial activity:
- Intermodal is a good barometer of retail activity:
FLASH PMIs
U.S.: Strong private sector growth maintained, despite manufacturing slowdown in June
June data indicated that U.S. private sector firms experienced a strong end to the second quarter of 2018, driven by another robust contribution from service providers. In contrast, manufacturing production growth slowed for the second month running, to its weakest since September 2017.
The latest survey also revealed intense pressure on manufacturing supply chains, with delivery times for inputs lengthening to the greatest extent since the index began in May 2007.
Adjusted for seasonal influences, the IHS Markit Flash U.S. Composite PMI Output Index registered 56.0 in June, down only slightly from a 37-month peak in May (index at 56.6). As a result, the latest reading signalled that private sector output continued to expand at one of the fastest rates seen over the past three years.
Meanwhile, new business growth eased to a six-month low in June, which helped to moderate some of the strain on operating capacity. Higher levels of unfinished work have nonetheless been recorded in each of the past 12 months.
Employment growth slowed from the three-year peak seen in May. At the same time, business expectations for the coming 12 months were the least upbeat since January. Strong cost pressures persisted in June, led by another marked rise in manufacturing input prices. Moreover, average prices charged by private sector firms increased to the greatest extent since September 2014.
A robust rate of service sector growth helped to underpin the overall upturn in private sector output during June. At 56.5, down slightly from 56.8 in May, the seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index posted its second-highest reading since April 2015.
Higher levels of service sector activity were supported by another marked rise in new work and a solid rate of job creation in June.
However, the latest survey also highlighted stronger inflationary pressures. Input costs increased at the fastest rate since September 2013. Service providers widely commented on higher prices for fuel, staff salaries and steel-related items.
Greater operating expenses contributed to the steepest rise in average prices charged by service sector firms for almost four years in June.
June data highlighted a clear loss of momentum for the manufacturing sector, following the strong growth rates seen in recent months. At 54.6, down from 56.4 in May, the seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) signalled the slowest improvement in overall business conditions since November 2017.
Manufacturing production growth slipped to a nine-month low, reflecting weaker gains in new business volumes in June. The latest upturn in new work was the softest since September 2017, partly reflecting a slight drop in export sales.
Longer suppliers’ delivery times persisted in June, with the latest deterioration in vendor performance the greatest recorded since the survey began more than 11 years ago.
Manufacturers noted that a shortage of transport capacity following tighter trucking regulations had led to supply bottlenecks. Some firms also noted that efforts to build up safety stocks had been held back by shortages of stock among vendors.
Meanwhile, strong demand for raw materials and stretched supply chain capacity continued to push up average input prices in June. Survey respondents widely commented on rising steel costs and increased prices for related items.
The overall rate of input price inflation eased further from its recent peak, but remained among the strongest seen since 2012. At the same time, factory gate charges increased at a robust pace that was little-changed from April’s near seven-year high.
Despite growth cooling slightly in June, the latest numbers round off the best quarter for three years, and suggest economic growth has lifted markedly higher than the 2.3% rate of expansion seen in the first quarter to well over 3%.
The upturn also continues to create new jobs in encouragingly high numbers. The employment gauges from the June surveys are running at levels indicative of non-farm payrolls rising by 190,000, with hiring remaining solid in both the services and manufacturing sectors.
Price pressures remain elevated, however, widely blamed on a mix of rising fuel prices and tariff-related price hikes, as well as supplier’s gaining pricing power as demand outstrips supply for many inputs.
Risks are tilted to the downside for coming months. Business expectations about the year ahead have dropped to a five month low, led by the weakest degree of optimism for nearly one and a half years in manufacturing. Exports are back in decline, showing the worst performance for over two years, causing factory order book growth to slump sharply lower compared to earlier in the year.
For the first time this year, factory output is growing faster than order books, suggesting production may be adjusted down in coming months. Inflows of new business into the service sector have meanwhile cooled to the weakest since January. Finally, although employment is still rising strongly, even here there are signs of weakness, with the latest rise in payrolls being the lowest for a year.
The IHS Markit Eurozone Composite PMI rose from 54.1 in May to 54.8 in June, according to the flash reading (which is based on approximately 85% of usual replies). While an improvement on the 18-month low seen in May, the June reading represented the second-weakest expansion seen over the past 17 months, highlighting how the pace of business activity growth has eased since the turn of the year. At 54.7, the second quarter average PMI reading is the weakest since the end of 2016.
Encouragingly, inflows of new orders also picked up, after having fallen to a one-and-a-half year low in May, registering the largest gain since April. Hiring likewise perked up, with June seeing the largest payroll gain since January and one of the steepest rises seen over the past 18 years.
The rebound in June in part reflected business activity and order inflows having been subdued in May by an unusually high number of holidays. However, the surveys have also seen rising numbers of companies report that demand growth has slowed in recent months compared to earlier in the year. Weakened output and order book trends have been linked in some cases to trade worries and intensifying political concerns, though also with capacity constraints continuing to be commonly reported, linked in turn to raw material supply and skills shortages.
Business expectations have moderated accordingly. June saw the survey’s gauge of future output expectations drop to a 19-month low.
The June rebound was led by an improvement in growth of service sector activity to the fastest since February, but manufacturing output growth slipped to the lowest since November 2016. Factory order inflows rose at the weakest pace in 22 months, while export growth remained close to the lowest for over one-and-a-half years.
Hiring accelerated in both sectors, but the pace of manufacturing job creation remained below the highs seen at the turn of the year. New service sector jobs were created at the sharpest rate since October 2007.
The flash PMI survey gauge of input cost inflation across both manufacturing and services meanwhile rose to its second-highest in seven years, falling just short of January’s peak. A further widespread lengthening of supplier delivery times meant vendors were often able to hike prices as demand outstripped supply. Higher oil and fuel costs, as well as rising wages, were also often reported.
Companies sought to pass higher costs on to customers, pushing average selling prices for goods and services up at the fastest rate since February. The latest rise in prices was the third largest in the past seven years. Notably, goods price inflation slipped to a nine-month low but average charges for services showed the second largest monthly rise seen over the past decade.
By country, both France and Germany saw business activity accelerate in June, albeit with stronger service sector expansions impeded by slower manufacturing growth. Business activity growth in France rebounded from May’s 16-month low, yet remained the second-weakest seen over the past ten months. Similarly, the increase in German business activity measured across both sectors was the second-weakest since September 2016. Elsewhere, growth picked up momentum for the second month running, but saw the weakest calendar quarter since the end of 2016.
With growth kicking higher in June, the surveys are commensurate with GDP rising 0.5% in the second quarter.
Manufacturing is looking especially prone to a further slowdown in coming months, with companies citing trade worries and political uncertainty as their biggest concerns. Sentiment about the year ahead in the factory sector has sunk to its lowest since 2015.
Bloomberg’s economists are not worried:
The euro-area composite PMI survey suggests the economy is continuing to expand at a healthy pace. We view it as pointing to a rebound in GDP growth from the slowdown in 1Q, especially after the headline rose for the first time since January. The ECB is likely to see confirmation in the report that it made the right decision.
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Japan manufacturing sector growth picks up in June
- Flash Japan Manufacturing PMI® rises to 53.1 in June, from 52.8 in May.
- Output growth accelerates, despite slower rise in new business.
- Inflationary pressures intensify.
June data indicated continued growth in new orders, a faster rate of job creation, rising backlogs of work and increasing output prices. As such, there appears to be further legs in the manufacturing growth cycle.
That said, for the first time since August 2016, new export orders declined. With geopolitical risk aplenty, haven demand for the yen remains a downside risk to the country’s manufacturing exporters.
China’s Economic Growth Seen Holding Up, Bloomberg Survey Shows
The economy will grow 6.5 percent this year, the median estimate of 60 economists shows. That’s exactly what the government is targeting, and hasn’t changed since mid-January. The result shows confidence in the resilience of the economy, especially considering the deterioration in relations with the U.S. — the world’s largest economy and China’s biggest trading partner.
Economic expansion is seen slowing to 6.3 percent next year and 6.2 percent in 2020, according to the survey, which ended on Thursday. (…)
Gross domestic product will grow by 6.7 percent in the second quarter, up from the 6.6 percent forecast in the last survey, but down from the 6.8 percent achieved in the first three months of the year. (…)
Goldman, Morgan Stanley Stress Over Capital Returns Goldman Sachs and Morgan Stanley barely passed the Federal Reserve’s annual stress tests, raising doubts about their ability to grow dividends and buybacks over the next year.
All 35 banks subject to the tests passed, despite an unusually harsh exam that featured a severe global recession, the Federal Reserve said Thursday.
But it was a close call for the Wall Street duo of Goldman Sachs and Morgan Stanley on one particular metric, the so-called supplementary leverage ratio. This is a bank’s total leverage, a measure of total capital as a percent of total assets, including some off-balance-sheet exposures. The two banks’ leverage ratios fell to 3.1% and 3.3% respectively because of losses on loans and trading positions in the most severe scenario, bringing them perilously close the regulatory minimum of 3%.
In the next phase of the process, banks will ask the Fed to approve their capital-return plans for the next four quarters and announce the results on Thursday next week. (…)
