Q3 ends with a "bleh" for the economy, especially in manufacturing

After a lot of struggles in the 2nd and 3rd Quarter of 2019, the Purchasing Managers Index had some good news on the state of US manufacturing.

Manufacturing sector business conditions continued to recover in October, as signalled by a rise in the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™ ) 1 to 51.5, up from 51.1 in September. The rate of improvement was the fastest for six months, helped by stronger growth of output, new orders and employment.

October data also pointed to an increase in new export sales for the first time in four months. Stronger demand encouraged a marginal rebound in input buying, but inventory volumes were depleted again.

But if manufacturing slightly picked up in October, it’s still from a lowered level in September. That was reiterated again with a Commerce Department report showing manufacturers’ orders and shipments both declined last month, including a sizable drop in new orders.

New Orders
New orders for manufactured durable goods in September decreased $2.8 billion or 1.1 percent to $248.2 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, followed a 0.3 percent August increase. Excluding transportation, new orders decreased 0.3 percent. Excluding defense, new orders decreased 1.2 percent. Transportation equipment, also down following three consecutive monthly increases, led the decrease, $2.3 billion or 2.7 percent to $84.5 billion.

Shipments
Shipments of manufactured durable goods in September, down three consecutive months, decreased $1.0 billion or 0.4 percent to $252.5 billion. This followed a 0.1 percent August decrease. Transportation equipment, also down three consecutive months, drove the decrease, $1.0 billion or 1.2 percent to $84.6 billion.

In addition, new orders for last month were 4% behind where we were in September 2018. That’s a bad harbinger for future growth, if demand has declined.

And the other problem is on the other end of the supply line, as there are more items on shelves, and fewer waiting to go out.

Unfilled Orders
Unfilled orders for manufactured durable goods in September, down following two consecutive monthly increases, decreased less than $0.1 billion or virtually unchanged to $1,163.5 billion. This followed a 0.2 percent August increase. Fabricated metal products, down following three consecutive monthly increases, drove the decrease, $0.1 billion or 0.1 percent to $87.0 billion.

Inventories
Inventories of manufactured durable goods in September, up fourteen of the last fifteen months, increased $2.1 billion or 0.5 percent to $430.3 billion. This followed a 0.2 percent August increase. Transportation equipment, also up fourteen of the last fifteen months, led the increase, $2.1 billion or 1.4 percent to $145.3 billion.

The year-over-year numbers are also bad in these stats, with unfilled orders dropping by more than $20 billion from September 2018 (-1.8%), and inventories are up $19.5 billion under the last 12 months (+4.75%).

In addition, we found out yesterday that new homes sales dropped back down in September. And while the Federal Reserve of Atlanta still keeps projected GDP growth for Q3 at 1.8%, it’s in a slightly different form from the 1.8% they projected nearly 2 weeks ago.

Changes in contributions to Q3 GDP, Atlanta Fed
Consumption +0.06%
Equipment -0.07%
Nonresidential structures -0.02%
Residential homes +0.02%
Net Exports -0.01%
Inventories +0.03%

And even consumption is still projected to only grow 2.7% for the quarter, and September’s retail sales declined.

Looking ahead, the Chief Economist of IHS Markit (who puts together the PMI survey) said things would continue to sputter to round out 2019.

“Despite business activity lifting from recent lows, the survey data point to annualized GDP growth of just under 1.5% at the start of the fourth quarter, and a near-stalling of new order growth to the lowest for a decade suggests that risks are tilted toward growth remaining below trend in coming months.

“An increased rate of job culling adds to the gloomy picture, with jobs being lost among surveyed companies at a rate not seen since 2009. At current levels, the survey’s employment gauge indicates non-farm payroll growth slipping below 100,000.

“The overall subdued picture reflects a spreading of economic weakness from manufacturing to services, but encouragingly we are now seeing some signs of manufacturing pulling out of its downturn, in part driven by a return to growth for exports and improved sentiment about the year ahead, linked to hopes that trade war tensions are starting to ease.

And yet Wall Street has been on the rise in the last 2 weeks, likely because profit growth has been surprisingly well. But in the real economy, there are signs that the slower growth isn’t just at the factories these days, and the 4th Quarter will likely tell us if it reverses, or speeds toward a 2020 decline.