Morning Report: The manufacturing economy continues to slow down

Vital Statistics:

S&P futures3,92138.25
Oil (WTI)89.122.44
10 year government bond yield 3.96%
30 year fixed rate mortgage 7.06%

Stocks are higher as we begin the Fed meeting. Bonds and MBS are up.

The Fed meeting begins today, and the focus will be on the pace of future rate hikes. The market is hoping that this meeting will be the last in the string of 75 basis point hikes. Generally speaking an increase of 50 basis points is considered to be an assertive move against inflation, while 75 basis points is pretty dramatic. We won’t get projections or a dot plot this meeting, so it all comes down to parsing the language in the press release and hanging on every word Jerome Powell says at the press conference.

The manufacturing economy barely expanded in September, according to the ISM Survey. The 50.2 reading is the lowest since May of 2020. Leading indicators such as new orders, are contracting.

“The U.S. manufacturing sector continues to expand, but at the lowest rate since the coronavirus pandemic recovery began. With panelists reporting softening new order rates over the previous five months, the October index reading reflects companies’ preparing for potential future lower demand. In the meantime, demand eased, with the (1) New Orders Index remaining in contraction territory, (2) New Export Orders Index below 50 percent for a third consecutive month and at a faster rate of contraction, (3) Customers’ Inventories Index remaining at a low level, with the same reading as in September and (4) Backlog of Orders Index slipping into contraction. Output/Consumption (measured by the Production and Employment indexes) improved month over month, with a combined positive 3-percentage point impact on the Manufacturing PMI® calculation. The Employment Index shifted from contraction to a reading of 50 percent (unchanged), and the Production Index increased by 1.7 percentage points, staying in modest growth territory. Business Survey Committee panelists’ companies are continuing to manage head counts through hiring freezes and attrition to lower levels, with medium- and long-term demand still uncertain. Inputs — defined as supplier deliveries, inventories, prices and imports — mostly accommodated growth. The Supplier Deliveries Index indicated faster deliveries and the Inventories Index dropped 3 percentage points as panelists’ companies continued to manage the total supply chain inventory. The Prices Index decreased for a seventh straight month and fell into contraction territory, which should encourage buyers.

It is clear the Fed’s tightening regime is gaining traction, and the report of the Prices index falling into contraction is a leading indicator that inflation is being brought under control. The decrease in prices is being driven primarily by lower energy and metals prices.

Notwithstanding the ISM report, there were 10.7 million job openings at the end of September, according to the JOLTs jobs report. This partially offset a pretty big decline in August. Hires decreased to 6.1 million and the quits rate remained stuck at 2.7%

Construction spending rose 0.2% in September, which was up 10.9% year-over-year. Residential construction was flat.

8 Responses

  1. Yesterday I listened to oral arguments in both of the affirmative action cases before SCOTUS (UNC and Harvard). It is interesting how desperate the justices of the left are to come up with some means of declaring race-based preferences legal, to the point of making obviously contradictory arguments.

    The main tack taken by Brown Jackson (who recused herself from the Harvard case, but was there for the UNC case) was to repeatedly assert that we have, and can have, no idea whether the single factor of race was determinative because there are over 40 other factors used on the common app for admissions. She bizarrely seemed to think the fact that ticking a race box was voluntary rather than mandatory was particularly important, as if the ability of a candidate to refrain from giving race information somehow prevented admissions officers from giving an advantage to those who do tick the “right” box. But in any event, the primary focus of her questions seemed to be to establish the rather counterintuitive notion (given the admission processes explicit goal of “diversity”) that we can’t know that the race of an applicant plays a factor in admissions.

    Kagan, on the other hand, seemed to be very concerned about claims that, if UNC and Harvard were disallowed from using race as an admission factor, then acceptance levels of certain minorities would plummet. There was a lot of discussion about exactly how true this would be, but no one seemed to point out that if Kagan’s concern was legitimate, then Brown-Jackson’s claim was nonsense.

    I will say this for Kagan, though. I think she did identify a fundamental problem in the plaintiffs argument, and thus scored some points. The plaintiffs seemed to accept that the goal of racial diversity was a legitimate one for admissions officers to seek, but argued that it could be achieved via race-neutral means. Kagan raised a hypothetical situation in which it could not be achieved….would race-conscious measure then be allowable under the 14th amendment in order to achieve this legitimate interest? I don’t think the plaintiff handled this line of questioning well, primarily because he was loath to attack the idea of “diversity” as a goal in the first place.

    What was also notable was the routine bait and switch in discussing the whole concept of “diversity”. Whenever discussing the alleged educational benefits of “diversity” directly, the discussion always revolved around diversity of things other than race…socio-economic background, thought, experience, etc. But, of course, the measure of whether this “diversity” has been achieved was strictly racial. Hence Kagan’s concern about statistical racial representation and what would happen if schools were not allowed to favor one race over another. It was frustrating to me that none of the conservative justices really addressed this bait and switch. Thomas sort of did, when he pointed out more than once that he had no idea what “diversity” actually meant and asked the lawyers to explain it. And Alito came close when he pointedly asked why the admissions offices even use race in their efforts to achieve “diversity”. But neither ever really hit the conflation head on.

    And speaking of frustration, I’ve concluded that I could never be a good lawyer in front of SCOTUS. Kagan and Sotomayor repeatedly raised questions that had nothing to do with what the law said or meant, but instead were about what they clearly thought would be objectionable impacts if the plaintiff was correct. I kept wanting the lawyer to say something like “Those are political questions that would be more properly be adjudicated by the political branches. Your job is to apply the law regardless of whether or not you agree with the outcome of doing so.” Of course the lawyer did no such thing, but I am not sure I would be able to contain myself.


    • “and thus scored some points. ”

      I don’t think oral argument will affect the rulings at all.


      • jnc:

        I don’t think oral argument will affect the rulings at all.

        You are definitely correct about that. Indeed, for the Wise Latina, Kagan, and Brown-Jackson, I don’t think the law itself will affect their rulings. By “scored some points” I simply mean that she highlighted legitimate flaws in their position.


  2. Worth noting:


  3. Biden’s speech tonight will be a game changer.


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