Manufacturing, construction and overall economic growth on the slide

As September started, we saw more evidence that manufacturing was in decline last month, making recession a more likely opportunity.

The ISM factory index indicated the first contraction in activity since February 2016. The Institute for Supply Management’s manufacturing index fell to 49.1% in August from 51.2% in July.

Any reading below 50% indicates worsening conditions. This is the first contraction in 35 months. Economists surveyed by the Wall Street Journal forecast the ISM factory index to slip to 51.0 in August.

What happened: The new orders index sank 3.6 points to 47.2% and the production index fell 1.3 points to 49.5%. Only nine of the 18 manufacturing industries reported growth in August.

It's even more alarming is when you dig into the actual ISM report, and it shows all of these areas either contracted, declined, or both.

The deterioration in the overall ISM manufacturing index over the last 12 months is also startling.

And Tuesday also told us things were not much better in the construction sector, which continues to stagnate and/or decline in many areas.

Total Construction
Construction spending during July 2019 was estimated at a seasonally adjusted annual rate of $1,288.8 billion, 0.1 percent (±1.3 percent)* above the revised June estimate of $1,288.1 billion. The July figure is 2.7 percent (±1.6 percent) below the July 2018 estimate of $1,324.8 billion. During the first seven months of this year, construction spending amounted to $733.8 billion, 2.1 percent (±1.2 percent) below the $749.9 billion for the same period in 2018.

Private Construction
Spending on private construction was at a seasonally adjusted annual rate of $963.1 billion, 0.1 percent (±0.7 percent)* below the revised June estimate of $963.7 billion. Residential construction was at a seasonally adjusted annual rate of $506.7 billion in July, 0.6 percent (±1.3 percent)* above the revised June estimate of $503.5 billion. Nonresidential construction was at a seasonally adjusted annual rate of $456.4 billion in July, 0.8 percent (±0.7 percent) below the revised June estimate of $460.2 billion.

Among the worst performers year-over-year are Residential construction, down $36.4 billion (- 6.6%), and Commercial buildings, down $16.3 billion (-16.5%). In addition, highway and street construction has slid by $15.3 billion (-13.6%) on a seasonally-adjusted basis in the last 3 month, although it’s still up over the last 12 months (+2.3%).

These reports, combined with mediocre reports on income and leading indicators from last week, and news of a continuing trade deficit today, helped to drop the Atlanta Fed’s GDP Now prediction for Q3 to 1.5%

That doesn't mean all is hopeless, however. For example, the Federal Reserve reported today the non-goods side of the economy were still holding up.

Economic activity in the crucial non-financial service sector was either steady or improving across the country through the end of August, according to the “Beige Book” survey released by the Federal Reserve on Wednesday.

What happened: The overall economy expanded at the same “modest pace” seen in earlier reports this year, the survey said.

While there was continued uncertainty over U.S. trade policy with China, a majority of business owners “remain optimistic about the near-term outlook,” the Fed found. Manufacturing and agriculture were the two weak spots in the late summer.

Reports on consumer spending was “mixed,” with auto sales continuing at a modest pace and “solid” tourism activity. Employment grew at a modest pace, with moderate upward wage growth. Price increases were modest. Businesses said that the impact of recent trade tariffs on Chinese products would not be felt for a few months on prices that consumers pay at the store.

That being said, as the 3rd quarter enters its 3rd month, it seems that the consumer and (to a lesser extent) government spending is all that's left keeping our economic expansion going after 10 years. And if the declines in manufacturing and construction become job losses in the coming months, I can’t see where the consumer keeps buying at the levels that they have.

The spiral will then likely be on, and with an increasing budget deficit, what’s going to stop the bleeding over the next year?