Everything But the Kitchen Sink

Of all the items populating a kitchen, the sink is the most difficult to remove. Tethered by plumbing that journeys through walls and floors and fused into countertops, it’s little wonder, “Everything but the kitchen sink” says what it says so well. Semantical historians guided us to a different kind of a journey relayed in a 1918 edition of The Syracuse Herald: “In fact, I shall rather enjoy the experience, though the stations are full of people trying to get out and the streets blocked with perambulators, bird cages and ‘everything but the kitchen sink.’” The saying caught a fresh head of steam in World War II descriptions of intense bombardment: “They threw everything they had at us, except the kitchen sink. In fact, they threw everything they had at us, including the kitchen sink.”

Though we forecasted a double dip in October’s Institute for Supply Management’s (ISM) Manufacturing Report on Business, even we were blown away by the report throwing the kitchen sink at us. To pay respects, we in turn, “kitchen-sinked” the report by asking a question: “How widespread across each metric tracked were trends across the 18 industries tracked by the ISM?” Our gauge thus captures the survey’s ten components’ breadth measures. An inventory of our inputs includes: New Orders, Production, Employment, Inventories, Backlogs, New Export Orders, Imports, Customers’ Inventories, and Prices and Declines in Deliveries.

Dubbed the QI’s “ISM Mfg Breadth Indicator,” it kicked off 2023’s fourth quarter at 31.0 (purple line), down from the second and third-quarter averages of 48.7 and 42.0, respectively. Over a limited 19-year history, such wretched breadth has but two comparisons. Both 2008’s fourth quarter and 2009’s first quarter fell in the Great Recession.

Kitchen-sinking ISM manufacturing yields intriguing comparisons to the U.S. GDP cycle. To be sure, sequential quarterly growth rates don’t perfectly mimic the ISM breadth indicator’s path. But there are clear outliers to stand as comparisons, namely the European and Industrial recessions which fell in the mid-2010s. At present, the divergence between the ISM kitchen sink and U.S. GDP growth (orange bars) is about as wide as it gets. The tension that’s built up should break in the direction of weaker GDP, not a stronger ISM.

It’s common to think of GDP as the U.S. economy’s top-line figure, an aggregate revenue. ISM’s corollary is New Orders, which relapsed in October, falling abruptly to 45.5 and dashing hopes of those who’d labeled September’s 13-month high of 49.2 a turning point in the cycle. Last month’s retrenchment highlights one of QI’s leading barometers – persistence. On that note, October marked the 14th straight contraction, which has six precedents since the series’ 1948 inception: five during the brutal 1981-82 recession and one in the Great Recession. We’d remind you that while history never repeats itself, we’ve lost count of the number of rhymes we’ve counted between the current episode and that of the early 1980s double-dip recession.

Extended contractions in future demand ultimately manifest as credit events. Enter the National Association of Credit Management (NACM) Credit Managers’ Index (CMI). We’d be remiss to deny you October’s money quote: “The overwhelming concern cited this month is deterioration in customer cash management. Whether they are asking for more time to pay, or just ignoring invoices until they get sent to collections, respondents noted that stress is rising in their accounts receivables portfolios.” To wit, the manufacturing CMI for Accounts Placed for Collection recorded the largest drop of any single metric – by 2.9 points, to 46.5, the lowest level since October 2019 (yellow line).

Answering the distress call, the ISM survey noted that companies “took more immediate actions to reduce head counts, using layoffs as the primary tool,” which was evident in continuing jobless claims for the manufacturing sector. Since June, more than 80% of U.S. states have reported a rising year-over-year (YoY) trend in continuing factory sector claims (green line); prior streaks of equal length have been recessionary.

The precursor was ISM Backlogs, which have been contracting since October 2022 (red line). One of the most revealing micro comments came from the machinery industry: “Seeing a slowdown on bookings, and our backlog is down to five days from 15 weeks earlier this year.” On an apples-to-apples basis, backlogs have collapsed to one workweek from 15. Bear in mind, the machinery sector is the backbone of the core of capex.

Backlogs presage headcount. As if on cue, both the ISM and S&P global manufacturing PMIs posted dual drops into sub-50 territory in October. Across the series’ overlapping histories since 2007 heading into this Friday’s employment report, the pandemic aside, there are but 15 other months when both business surveys’ employment surveys contracted in sync; 14 coincided with declines in manufacturing payrolls making for a 93% hit rate.

If you prefer real-time metrics, Lightcast Job Postings, benchmarked to January 2020, show a similar pattern, and stand 16% below their pre-pandemic level. Indeed.com job postings have been deteriorating all year, registering a -21.5% YoY drop in October. Though we’ve little faith in the series, dated JOLTS job openings in manufacturing were down -22.8% YoY through October.

We leave you to ponder a kitchen-sink quote from the leading chemicals sector excerpted from yesterday’s ISM report: “Economy absolutely slowing down. Less optimism regarding the first quarter of 2024.” It’s a fitting punctuation point on yesterday’s trading day that both nominal and real U.S. ten-year Treasury yields fell 20 basis points.

Posted in Daily Feather.