According to Hatzius:
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The June employment report also points to a meaningful factory slowdown. While manufacturing payrolls logged another (small) gain, the manufacturing workweek fell by ½ hour, as shown in Exhibit 2. This is a very big drop by historical standards?in the 4th percentile of month-to-month changes using data that go back to 1936. This may be a sign that the manufacturing sector may be losing steam even more quickly than suggested by the June ISM report.
…and the Labor Market Softened in June
Even beyond manufacturing, the June employment report was weak. This was most obvious in the household survey, where the drop in the unemployment rate from 9.7% to 9.5% was entirely due to a big decline in the labor force. A more accurate gauge is the decline in the employment/population ratio from 58.8% in April to 58.7% in May and then to 58.5% in June, shown in Exhibit 3. (We note the April number in order to illustrate that the weakness cannot just be explained by Census-related ups and downs?after all, the level of Census employment was higher in June than in April.)
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