Construction Spending Drops; Manufacturing Weak

From the WSJ:

U.S. manufacturing activity contracted slightly in May, as exports kept the sector afloat and prices surged, but performed better than many economists had expected.

The Institute for Supply Management said its index of manufacturing activity rose to 49.6 in May from 48.6 in April. It was the fourth consecutive month that the index was below 50; readings below 50 signal a contraction in overall activity.

Even so, the report bolstered other recent data suggesting the economy is stagnant but not collapsing.

A separate report showed construction spending in April dropped by a seasonally adjusted 0.4% from the previous month, to $1.12 billion. Spending on private nonresidential construction, which includes hotels and office buildings, rose 1.6%, partly offsetting the slump in residential construction, which declined 2.3% in April and is down 21% from a year earlier, the Commerce Department said.

In the ISM report, exports continued to increase, extending a five-and-a-half-year trend that is helping offset slowing U.S. demand, and production expanded. New orders rose and imports grew slightly. But high commodity costs pushed prices to a four-year high, and employment and inventories contracted.

"Were it not for the weak dollar," which makes prices of U.S. goods cheaper abroad and stimulates export orders, "I really do believe we'd be looking at far lower readings," said Norbert Ore, a Georgia-Pacific Corp. executive who directs the survey. He noted that 80% of ISM member companies are exporters.

TO place this information in the largest context, go to this article which has a group of charts related to the manufacturing sector.

Let's look at the graphs/charts of these numbers to see what they say:



The general trend since January 2004 is lower. That's the macro-trend that supplies the backdrop. That means the one month increase will have to continue for a few more months before we can say the trend is reversed. Also note this number has been below 50 for four months. That in an of itself is a trend (a negative one) to keep in mind.



As for construction, it has had a negative impact on the economy for the better part of two years now. Notice that the latest numbers -- which show a year over year decline -- are being compared to periods where the number was already negative. That's not good news in the long run.

The fact that most ISM companies are exporters is very eye-opening. It does imply the number is skewed towards positive numbers in the current environment.

Finally -- notice this chart from the WSJ article:



This is the prices part of the ISM report, which has been increasing for some time. That's not good. As the article noted:

Respondents to the ISM survey noted prices are "skyrocketing" and posing "major hurdles." The prices component of the ISM survey jumped to 87 in May from 84.5 in April, and Mr. Ore noted that doesn't yet capture the full impact of rising oil prices.

This chart from the IBD story shows two things. First, it gives us a better read of how the current numbers compare. Secondly, it shows how exports are helping out right now.

Consumers Face Strong Headwinds

Consumer spending accounts for about 70% of overall US economic growth. Therefore, the consumer's health is vitally important to further expansion. However, the consumer is under tremendous pressure right now from a variety of fronts. Consider the following:

Decreasing Job Growth



The chart above has the year over year percentage change in employment growth graphed as a line. Notice it has been dropping since the end of the 1Q2006. Also note the gray lines -- which represent the monthly payroll change -- have been decreasing in size as well, indicating the monthly change in payrolls is decreasing. As a result, the unemployment rate is ticking up (although it is still at solid levels).



Decreasing Home Values



The chart above is the Case-Schiller home price chart. Notice the following:

-- During the last expansion home prices were very stable.

-- Home prices double in the first 6 years of the 2000s.

-- Home prices are now dropping:

That comes on top of the hit homeowners are taking from the drop in housing prices, which fell 7.7 percent in 20 metropolitan areas during November from a year earlier, according to the S&P/Case-Shiller price index.

Inflationary Pressures

Consumers are seeing high price increases:



Above is the year over year percentage change in inflation.

In addition, here are some charts of fuel prices from This Week in Petroleum









A Ton of Debt





Above are two charts. They use the total outstanding household debt number for the Federal Reserve's Flow of Funds and information on GDP and disposable personal income from the Bureau of Economic Analysis.

There is no economic magic line which says, "over this line is a bad amount of total household debt and below this line is good household debt." It's really more of a sliding scale. Notice that the total household debt number has been increasing for thirty years. At some point, that will start to cause problems.

I have no idea how much stress is too much for the consumer. However, the facts above indicate he is under a tremendous amount of stress right now.

-- Job growth is dropping,

-- Home values are dropping,

-- Inflationary pressures are increasing and

-- He has a ton of debt to deal with.

Charts are from Economday