One of the original counties in California, Napa dates to 1850, right there with the state’s admittance to the Union. While renowned for the hundreds of hillside vineyards that pepper its valley, Napa County’s largest lake is itself a marvel of engineering. Constructed from 1953 to 1957, Monticello Dam is a 304-foot concrete arch dam that impounded Putah Creek to create Lake Berryessa, named so for the first European settlers in the Berryessa Valley — José Jesús and Sexto “Sisto” Berrelleza. Water from the reservoir primarily supplies agriculture downstream, in the Sacramento Valley. Noted for its classic, uncontrolled morning-glory-type spillway, the dam is effectively a giant drain. At the surface, the spillway measures 72 feet across. From there, water drops 200 feet straight down a narrowing shaft, measuring 28 feet in diameter at the bottom, where it turns 90 degrees and flows into Putah Creek. At the lake’s peak level, 15.5 feet above the funnel, the spillway can drain 48,400 cubic feet per second, a rate which would fill an Olympic-size swimming pool in two seconds.
Employment report weeks can be rife with spillovers. Last Friday’s Institute for Supply Management (ISM) manufacturing survey revealed weakness across its internals. Just as water drains from Lake Berryessa, trends in industrials flow from upstream production to the downstream trade channels of wholesale and retail. The spillover effects most closely monitored between manufacturing to the broad service sector pertain to the labor space.
As busy as the week is, yesterday’s economic calendar was quiet as a mouse. The sole data on hand: October’s final Factory Orders. Manufacturing New Orders, Shipments, and Inventories provide a prism into the demand-supply picture. In October, New Orders posted a year-over-year (YoY) decline of -2.1% (orange line). Being the leading indicator, this stood south of coincident Shipments, which were -1.6% YoY (purple line) and lagging Inventories, at -0.3% YoY (light green line).
This left-tail setup – New Orders < Shipments < Inventories with all three contracting – has occurred 7% of the time since 1993, during and after the 2007-09 Great Recession, during the 2015-16 Industrial Recession. For the current repeats of this phenomenon, in July and October of 2023, to qualify as full-blown recessions, we’d have to see spillovers to non-manufacturing employment, which occurred in the 2000s recessions but were absent from the mid-2010s Industrial Recession (yellow bars).
Another angle to detect inflection is ISM Backlogs. For more than a year, this principal gauge of future labor demand has been in the red (blue line); its services counterpart has been uneven for the last eight months (teal line). With that as backdrop, Lightcast Job Openings light the path forward. The aggregate figure has seen a quickening slippage in the four months ended November (red line), landing at -18.2% below the January 2020 benchmark. December’s outset was uglier, which is unusual as the series tends to trough the last week of the year coinciding with the holidays. Even so, the latest -27.8% is in line with pandemic lows. Drilling down to industries gets gruesome: At -58.0%, Professional and Business Services hit a new low while Financial Activities (-48.7%), leisure and hospitality (-20.1%) and education and health services (-19.0%) dropped to levels last seen in early 2021.
Credit trends add an additional viewpoint. In the two months ended November, the National Association of Credit Management has flagged a drop-off in Amount of Credit Extended to the services sector. To normalize this series with ISM Services Employment index, we z-scored the two. We found that the two series have a strong .86 correlation since 2005 (lower left chart). Looking ahead to today’s ISM Services release, the decline in the NACM series points to Employment sinking below the 50-breakeven mark, from October’s 50.2.
Even as goods consumption has fallen off, travel has hung in there. When judging the current backdrop for this most discretionary service item, limiting an analysis to U.S. domestic data misses the bigger picture. The Canadian Federation of Independent Business’s (CFIB) business barometer index for hospitality has raised a flag north of the border, collapsing by an unprecedented -22.6-point in the four months ended November. Last month’s 40.1 index reading also was a record low (yellow line) since the series’ 2000 inception. Note, the gauge measures the 12-month outlook, not current activity.
The devilish details tell us that about 400,000 U.S. travelers cross the border into Canada every day. Because it’s such a popular destination for Americans, it proxies domestic U.S. travel. To that end, we refer to industry source Smith Travel Research (STR), which tracks U.S. hotel average daily rates (ADR). Echoing Lightcast’s unusual weakening into late November, STR’s ADR, gauged monthly, eased to 3.5% YoY in November from 4.9% YoY in October (green line). The last week of November, however, scored a barely discernible 0.9% YoY advance. As if on cue, in the last 48 hours, we’ve seen headlines cross of store closings for three brands that cater to the adventurous traveler in us — Patagonia, REI and Camping World.
ADR judges both discretionary consumer spending and, by extension, previews core service inflation. And as we gauge spillover risk today, the sharp decline in the CFIB series during the Great Recession – no victim of a forced shutdown or beneficiary of an equally technical reopening, but rather a fundamental slowing in the economy born of a weakening labor market — should provide fair warning of what’s to come.