Let's suss out the health of the US economy by understanding first how the real economy actually works.
Inflation/Deflation ---->> Monetary policy ----->> Economic activities ----->> Country's growth
The aforesaid process is depicted in layman terminology for easy understanding. When inflation or deflation is detected, the government will tweak its monetary policy accordingly and this will impact the economic activities to achieve the desired country's growth.
In economic terminology, the process is depicted as follow:
CPI/PPI ----->> M1-M2 spread/3m-10y yield spread ----->> PMI ----->> GDP
Since PMI is a leading indicator of the GDP, we will focus on dissecting the PMI to extrapolate US future GDP growth.
I've charted the manufacturing PMI process for easy reference as follow:
The headline manufacturing PMI is made up of 5 sub-indices: New orders, output, employment, suppliers' deliveries and stocks of purchases (inventories).
IHS PMI (USA)
The IHS/Markit US Manufacturing PMI was revised slightly lower to 52.4 in March of 2019 from a preliminary of 52.5 and 53 in February. The reading pointed to the slowest growth in factory activity since June of 2017, amid softer increases in output and new orders. Yet, Q1 average was the lowest since Q3 2017.
The IHS PMI (USA) is showing continuous declines but we will focus on ISM which is the official PMI.
ISM PMI (USA)
The ISM Manufacturing PMI in the US rose to 55.3 in March of 2019 from 54.2 in February which was the lowest reading since November of 2016. It compares with market expectations of 54.5. Faster increases were seen for new orders, production and employment.
Since the new orders are made up of new export order and local order, the US internal(local) order is growing at (1.9% - -1.1%) = +3%. Wow! At first glance, it looks like the US is having tremendous growth since the PMI is at 55.3% and the new local order is growing at 3%.
However, if we delve deeper and look at other sub-indices, we can spot some discrepancy. We will also try to figure out the cause for the local order to grow so well.
The new orders are growing at +1.9% but the production is only growing at half the rate of +1%. Why? This is because the customers' inventories have increased due to the net effect of neutral growth in orders (1.9% + -1.9% = 0). The lower production growth (1% compared to new order 1.9%) also impacts the supplier's deliveries with the growth of -0.7%. The overall phenomenon is a reflection of weak retail sales and durable goods orders.
US retail sales
US retail trade fell by 0.2 percent from a month earlier in February 2019, following an upwardly revised 0.7 percent growth in January and missing market expectations of a 0.3 percent gain. Sales fell for furniture, clothing, food and electronics and appliances, as well as building materials and gardening equipment. Retail Sales MoM in the United States averaged 0.35 percent from 1992 until 2019, reaching an all time high of 6.70 percent in October of 2001 and a record low of -3.90 percent in November of 2008.
The weak retail sales figure deserves some attention because the durable goods purchases are falling. The consumers and corporations are cutting back on durable goods purchases because of the bleak economic outlook.
Durable goods orders
New orders for US manufactured durable goods slumped 1.6 percent from a month earlier in February 2019, following a downwardly revised 0.1 percent gain in January and compared to market expectations of a 1.8 percent fall. Transportation equipment drove the decrease. Durable Goods Orders in the United States averaged 0.33 percent from 1992 until 2019, reaching an all time high of 23.50 percent in July of 2014 and a record low of -19 percent in August of 2014.
Durable goods orders ex-defence
New orders for US manufactured durable goods excluding defense fell 1.9 percent from a month earlier in February 2019, after a downwardly revised 0.4 percent growth in January and missing market expectations of a 0.1 percent gain. It is the largest decrease since January 2018. Durable Goods Orders Ex Defense in the United States averaged 0.32 percent from 1992 until 2019, reaching an all time high of 26 percent in July of 2014 and a record low of -19.70 percent in August of 2014.
US car sales
US car sales also fall by 2.5%.
The whole picture is telling us that defense spending is helping to hold up the economy but the private sector spending is declining. Therefore, we are expecting the employment figure in the PMI to fall alongside the supplier's deliveries in the future because of the slowdown. The private sector slowdown is also causing the imports and inventories to decline in the PMI.
The headline PMI may look good but the underlying sub-indices are showing otherwise.
In conclusion, we are expecting the US GDP to decline in the future unless the sub-indices in the PMI start to improve.
