Disappointing manufacturing and construction figures add to reasons Fed should cut sooner

We had some more disappointing economic news come out this morning.

U.S. manufacturing activity slowed for a second straight month in May as new goods orders dropped by the most in nearly two years, and spending on construction projects slipped unexpectedly the month before, the latest indications that a gradual slowdown in the economy is taking hold.

The Institute for Supply Management's manufacturing purchasing managers index for May fell to 48.7 from 49.2 in April, the research group said on Monday, noting an increase in references to "softening" among survey respondents. It was both the second straight decline and the second month below the 50 level that separates growth from contraction. Economists polled by Reuters had a median estimate for 49.6.

Meanwhile, construction spending fell unexpectedly for a second month in April on declines in non-residential activity, although there was an improvement in single-family home building.

That has been an ongoing trend for construction, both in the welcome increases in single-family housing (up over 20% in the last 12 months measured), but also with an increase of public sector construction in recent months, which has mitigated a drop in the value of private sector construction for the first 4 months of 2024.

Today's figures added to not-good numbers on consumer spending from Friday, and lower revisions for spending and income in previous months. And economic growth prospects are getting lowered as a result.

Together, the two reports pointed to continued sluggishness in the economy as the second quarter began. Gross domestic product grew at just 1.3% in the first quarter, and until recently had been expected to reaccelerate in the current period. The Atlanta Fed's GDP Now model, which had tracked at well above a 2% growth rate through May, was revised down to just 1.8% following the ISM and construction spending releases.

With interest rates remaining high thanks to the Federal Reserve's focus on elevated inflation, spending on manufactured products and capital projects has been sluggish. Data last week showed consumer spending on goods fell in April as households showed signs of husbanding their dwindling savings.

The decline in growth predictions as April's data has come in was a bit startling to me.

The same report that showed lower consumer spending in April also indicated that inflation had slowed down. And gas prices were lower in May than they were in April. Which makes me ask again "Why are we keeping interest rates at their highest levels in 23 years?" I also suspect that we may see slowdowns in job growth when the new figures for May come out this Friday, and while I don't think we are near recession coming, I can't ignore that data has not been as strong as we would have anticipated.

I would hope the Fed is also keeping track of this change in trajectory, and stop chasing the ghost of an inflation that isn't nearly the threat to our economy that an economic slowdown would be, especially if it happens in maufacturing and construction.