Market analysts spend a lot of time discussing the Federal Reserve, parsing moves in the fed funds rate of 25 basis points. Today’s market drop is related to classical macroeconomics since market participants realize that the business cycle hasn’t been repealed.
The ISM (Institute for Supply Management) report is closely watched. Economic activity in the manufacturing sector contracted in August for the fifth consecutive month and the 21st time in the last 22 months, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
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Inventories are counted as a positive in the ISM manufacturing composite index. Actually, rising inventories are a burden on a business and a classic macroeconomic indicator of potential recession. A business with rising inventories will cut back on new orders. In fact, that is occurring now.
The New Orders Index remained in contraction territory, registering 44.6 percent, 2.8 percentage points lower than the 47.4 percent recorded in July.
The services sector is far larger than the manufacturing sector. The August report for services isn’t available yet but the July report showed growth.
The Treasury yield curve is following a pattern that is typical of pre-recession. After a long period of negative slope the yield curve is flattening. When the Fed begins to cut the fed funds rate the curve will flatten further.
The Conference Board’s Index of Leading Economic Indicators has been negative since 2022 though no recession occurred. For the fourth consecutive month, the US LEI has not signaled a recession ahead.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 2.0 percent on September 3, down from 2.5 percent on August 30.
The manufacturing sector’s weakness is not enough to cause a recession as long as services remain strong. But individual stocks will be impacted if their company’s underlying business weakens. This could affect materials and energy stocks as well as manufacturing.
Wendy