Fox hunting was outlawed in the U.K. On the flip side, the Statue of Liberty reopened. Lance Armstrong (with help, we later discovered) had just won an unprecedented sixth consecutive Tour de France. Westport, Connecticut-based happy homemaker Martha Stewart was convicted of a felony and sentenced to five months in prison. Athens, the place where it all started, hosted the XXVIII Olympiad in August. The DREADED Boston Red Sox won the World Series in baseball for the first time since 1918, breaking a curse we’d hoped would last forever. Queen Elizabeth II christened the RMS Queen Mary 2 cruise liner, then the largest ocean liner in the world. West African countries including Chad and Mauritania suffered the worst Locusts Plagues in 40 years. At 1,667 feet, Taipei 101 the tallest skyscraper in the world was completed; it’s since been relegated to 11th place and Dubai’s Burj Khalifa 2,717-feet tall monster holds the top spot. And Condoleezza Rice was nominated to replace Colin Powell as U.S. Secretary of State.
Last week, Secretary Rice spoke to the student body of Culver Military Academy, where my oldest and middle sons currently attend, respectively as Lieutenant and Corporal. My first born, William Cecil, was born in 2004, the year all of the above-mentioned took place. He graduates into this world on June 5th and I couldn’t be more proud he will be an incoming Longhorn. In that he’s grown up derided for being an uptight white boy in today’s woke world, he was most attentive to Rice’s reply when she was asked who her mentors were. Her reply was unabashed and wholly unexpected to the student body: Her greatest inspirations and sources of support were a handful of uptight, successful old white men. Rice refused to apologize for the message it conveyed in “today’s world.” Bully for her for saying it as it was to her, regardless of what it was.
At the opposite end of the arrogance spectrum, we find one Jerome Powell. Debate rages on as to his intentions at the podium Wednesday afternoon. Why breathe the words, “if financial conditions warrant” if not to nod to having speculators’ backs? Why reassure investors he would whiff on mortgage-backed securities Quantitative Tightening if the intent was to not prick the housing bubble to which he gave birth? Why embarrass Jim Bullard by slapping down the possibility of a 75-basis-point (bps) rate hike given he had the bloody Employment Cost Index data in hand to be released yesterday morning? (When it comes to critical data releases, Fed officials know today — within 24 hours of release – what we’ll know tomorrow, including tomorrow’s nonfarm payroll report.) After all, the Fed funds rate is only more than 700 bps north of the Consumer Price Index.
At the risk of being disrespectful to higher-ups and those not sporting agendas, perhaps we should take Jerome’s word for it – the U.S. economy is “very strong.” Jobless claims and the unemployment rate, to be revealed for the month of April this morning – are rudely robust. The shame is unemployment indicators are the last to be invited to the business cycle party. If they are your North Star, you will always be lost at sea.
At QI, we prefer to look over the horizon and yelp, “Land, Ho!” That auspicious vista brings us to today’s trio of depictions that peer into rather than misguide us into driving through the backward-aimed prism of Pro Tempore Chair Powell.
Let’s start with the cyclically-leading-edge manufacturing sector. At the risk of being overly simplistic, you stop building out new space when growth prospects dim. We see no coincidence in the construction of Manufacturing facilities (green line) turning alongside that of nonresidential (orange line). Leading that trend is the Amazon effect we delved into in this week’s Quill which deep dove into the prospects for commercial real estate. In that we don’t buy into the farcical notion of coincidences, we see the nasty downturn of the REIT that most closely tracks Industrials (purple line) as fitting with the turn in job openings for workers in Transportation, Warehouses and Utilities (orange line).
On a holistic level, note that the Institute for Supply Management guides economic momentum via its Manufacturing and Services Reports. The New Orders-Inventories spread across both sectors (which equal the whole economy) leads near-term growth prospects. Wider spreads imply an acceleration in activity, while narrower spreads hail a cool down. When the spreads invert or turn negative (i.e., supply above demand) in a sizable fashion, it signals recession. Straight forward enough for you?
Where are we now? The manufacturing sector has backslid for the better part of a year. After peaking in 2021’s second quarter at 15.9, New Orders-Inventories for industrials eased to 1.9 at the start of 2022’s second quarter. The service sector apex occurred later and at a higher point. In 2021’s fourth quarter, Service New Orders-Inventories rose to a record high 20.8 before sliding in the first quarter and so far in the second quarter to 2.3.
Persistent compression in these demand-supply metrics implies a downshift in growth that could rival a stall speed in the broader economy. In the overlapping period from 1997, the manufacturing New Orders-Inventories spread averaged close to 8, while that of services averaged about 6. April’s readings are 4x and almost 3x less than the longer run trends for manufacturing and services. We are clearly not in 2004 anymore.