The Institute for Supply Management (ISM) measure of manufacturing activity slid to 49.7 in June, its lowest level since 2009 and before the recovery had started. Moreover, the move below 50 suggests that the manufacturing sector may actually be contracting now instead of growing, something evident in all but the Chicago manufacturing index last month. Exports were the weakest component, underscoring the drag that the slowdown in Europe and emerging economies is having on the U.S. Inventories are also coming down, after being rebuilt in the wake of Japan’s tsunami and Thailand’s floods.
Employment and production activity continued to expand, but one has to wonder how long that can last, with orders waning. Order backlogs are being worked as new orders slow.
Separately, construction spending accelerated at a 0.9% pace in May, several multiples of market expectations. The bulk of the gains occurred in the residential sector, as the housing market slowly returns to life. The apartment market is particularly strong, although we are beginning to see speculative building of single-family homes return in some high-end markets with short commute times. People are willing to pay for a new home if it saves them on gasoline costs and if prices are low enough to make the choice an option over urban sprawl. We also saw outsized gains in the manufacturing and public sectors; conservation is growing from a low base, while repairs to schools continue. The rest of the data were more mixed and less optimistic.
Bottom Line: The spurt in construction activity represents a small break in the clouds of what appears to be a growing economic storm. Summer has become a season to be cautious rather than carefree. I miss being a kid; even Detroit summers felt better than this.