Manufacturing Index, Consumer Confidence Hint of Modest Near-Term Economic Growth, While Residential Construction Data Suggest Broader Economic Downturn Looms

Key Takeaways:

• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings increased by 199,000 to 11.2 million in July, breaking a three-month streak of declining openings, according to the Bureau of Labor Statistics. Quits were down a modest 74,000 to 4.2 million, the lowest level since October 2021 but still high by historical standards.
• The ISM Manufacturing Index was flat at 52.8 in August. The new orders index rose 3.3 points to 51.3, its first time above 50 since May, indicating a return to modest expansion. The production index was down 3.1 points to 50.4, the supplier deliveries index declined one-tenth of a point to 55.1, and the inventories index fell 4.2 points to 53.1. The non-seasonally adjusted prices paid index fell 7.5 points to 52.5, its lowest level since June 2020 and its fifth consecutive monthly decline.
• The Conference Board Consumer Confidence Index rose 7.9 points to 103.2 in August, breaking a streak of three consecutive monthly declines and returning to its May level. Confidence in the present situation rose 5.7 points to 145.4 and consumer expectations for the future jumped 9.5 points to 75.1, its highest level since April.
• Private residential construction spending declined 1.5 percent in July, according to the Census Bureau. Spending on single-family construction fell 4.0 percent, the largest single monthly decline since May 2020, and multifamily construction was down 0.6 percent. Spending on home improvements rose 1.5 percent.
• The FHFA Purchase-Only House Price Index rose 16.2 percent in June from a year ago, a deceleration of 2.1 percentage points compared to May. This is the fourth consecutive month of home price deceleration.

Forecast Impact:

The August ISM Manufacturing Index report is consistent with our view that the economy likely returned to modest growth in Q3. Though manufacturing activity did not increase, it broke a two-month slide and remains at a level consistent with slightly below-trend GDP growth. Additionally, another decline in the prices paid index (though it remains above 50) supports our forecast for easing price gains through the rest of the year and offers further evidence that some supply chain issues are improving. Lower energy costs contributed to the falling prices paid index and are also likely responsible for the increase in consumer confidence. Gas price movements have an outsized impact on consumer surveys, but the increase in confidence among consumers may suggest that consumption in other areas could increase in Q3 as lower gas prices free up more disposable income. We continue to expect personal consumption expenditures to increase modestly in the third quarter compared to Q2.

The housing market continues to slow rapidly, as nominal single-family construction spending hit its lowest level since March. In real terms, spending was likely even lower as housing demand, especially for new homes, has fallen rapidly. This is consistent with our view that declines in residential fixed investment, which historically lead broader economic downturns, likely portend a recession. We currently forecast a modest recession to occur in early 2023. Further, we expect continued home price growth deceleration over the coming quarters.

Nathaniel Drake
Economic and Strategic Research Group
September 1, 2022

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