This 4th Of July, Let's Celebrate The Economic Improvements In The US

As we approach the 4th of July weekend, there are plenty of reasons to celebrate all the economic improvements we've witnessed in the U.S. recently. After all, the Fed is talking "taper" because economic conditions are so much better than they were a year ago, when the current round of quantitative easing was launched. Among other things, the nation is undergoing a manufacturing Renaissance. However, we did run into a bit of a "soft patch" this spring.

Chris Williamson, Chief Economist, Markit [June Manufacturing PMI]: - Manufacturing clearly down-shifted a gear between the first and second quarters, and is at risk of losing further momentum as we head into the second half of the year.

Output growth remained well down on the robust pace seen at the start of the year, and persistent weak order book growth suggests the sector is at risk of stalling. Domestic demand is far from lively, but it is a deteriorating export scene that is causing the real problems. Export orders are being lost at the fastest rate since the height of the financial crisis in mid-2009.


Firms are responding to the increasingly worrying order book trend by pulling back on recruitment. The employment picture from the survey is the weakest in almost three-and-a-half years, consistent with roughly 30,000 jobs being lost per month in the manufacturing sector. We will need to see a swift turnaround in this employment trend if the Fed’s projection of a drop in the unemployment rate to 7.0% by the end of the year is to be achieved.

The old order book, which is the key forward looking indicator for manufacturing, seems to show some pull-back.

Let's just ignore this Markit PMI measure for now. Instead we want to focus on the ISM Manufacturing index, which did in fact show an improvement in June - all thanks to the Fed's securities purchase program.

Finding it a bit difficult to hang your hat on this June "turnaround"? No worries. Manufacturing represents only a fraction of total U.S. output and hiring. After all, it's a service economy. So let's take a look an the latest non-manufacturing indicator.

Bloomberg: Service industries in the U.S. unexpectedly expanded in June at the slowest pace in over three years, indicating widespread progress may elude the world’s largest economy even as manufacturing improves [?].

The Institute for Supply Management’s non-manufacturing index dropped to 52.2 last month, the lowest reading since February 2010 from 53.7 in May, a report from the Tempe, Arizona-based group showed on Wednesday. The median forecast in a Bloomberg survey called for a rise to 54. A reading greater than 50 indicates expansion in the industries that make up almost 90 percent of the economy

Oops. Maybe this ISM measure is a lagging indicator, and things will improve going forward. All this QE has to go somewhere. Let's see what the forward-looking indicator, the order book, shows for the U.S. service economy.

It's actually the worst reading in 4 years. An economic improvement from a year ago? Maybe not so much. But that's o.k - we always have beer and BBQ (for now). Enjoy the holidays.