Happy Canada Day to my Canadian friends and colleagues!
The Atlanta Fed recently updated its GDPNow estimates for Q2 (which just ended yesterday). As you can see in the chart below, estimates have steadily declined over the past month and is currently -2.1%. This represents a sharp decline from yesterday’s reading, as today’s ISM and construction report drag the estimate lower.
Note the gap between the GDPNow estimate and consensus. Lots of revisions in our future!
According to the Atlanta Fed:
After this morning's Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7 percent and -13.2 percent, respectively, to 0.8 percent and -15.2 percent, respectively.
The ISM report released today showed a couple stats that suggest initial stages of a slowdown. In particular, New Orders took a big hit and are now contracting:
“The June Manufacturing PMI® registered 53 percent, down 3.1 percentage points from the reading of 56.1 percent in May. This figure indicates expansion in the overall economy for the 25th month in a row after a contraction in April and May 2020. This is the lowest Manufacturing PMI® reading since June 2020, when it registered 52.4 percent. The New Orders Index reading of 49.2 percent is 5.9 percentage points lower than the 55.1 percent recorded in May. The Production Index reading of 54.9 percent is a 0.7-percentage point increase compared to May’s figure of 54.2 percent. The Prices Index registered 78.5 percent, down 3.7 percentage points compared to the May figure of 82.2 percent. The Backlog of Orders Index registered 53.2 percent, 5.5 percentage points below the May reading of 58.7 percent. The Employment Index contracted for a second straight month at 47.3 percent, 2.3 percentage points lower than the 49.6 percent recorded in May. The Supplier Deliveries Index reading of 57.3 percent is 8.4 percentage points lower than the May figure of 65.7 percent. The Inventories Index registered 56 percent, 0.1 percentage point higher than the May reading of 55.9 percent. The New Export Orders Index reading of 50.7 percent is down 2.2 percentage points compared to May’s figure of 52.9 percent. The Imports Index climbed into expansion territory, up 2 percentage points to 50.7 percent from 48.7 percent in May.”
Total construction spending also declined slightly month-to-month. The overall change is subtle (and construction spending remains close to record highs) but helps to confirm the overall shift in direction. HOWEVER, buried in the data is an 11.6% month-over-month drop in residential construction spending (see table below). This reflects the overall deceleration of the housing market and the deterioration of the consumer.
*Correction*: I totally botched the residential construction numbers. Sorry.
Here’s the general order of operations for the current slowdown:
housing decelerates —> durable goods orders decline —> manufacturing contracts *you are here* —> inventories rise —> earnings decline —> employment falls
While consumption remains intact for now, I suspect we’re seeing a pulse of spending related to pent up travel demand. Once that wanes - combined with the full effects of deteriorating real incomes and the negative wealth effect from a housing slowdown - consumption could take a significant hit.
We’re probably in the early innings of a recession. Guess who gets it? The bond market.
The 10yr US Treasury yield is down about 59bps from its peak just a couple weeks ago.