Much of this year has been a guessing game of when the US would go into recession but for some sectors of the economy, it's never left and it's been brutal.
Today's ISM manufacturing PMI underscored the pain in the sector:
But if you squint, you can see it flattening out. If you dig deeper into the forward-looking indicators, there are signs of green shoots.
Some (but not all) regional manufacturing numbers have exhibited a similar pattern and it makes sense. Companies de-stocked early this year on fear of a recession and to right-size inventories after the covid bullwhip effect.
However the recession might not arrive and companies could soon be finding themselves short of inventories and over-booked for work. Heavy spending in the US IRA and CHIPS act could bolster the sector and bring back the optimism.
Construction is another spot to watch. Here's a chart from Skanda Amarnath highlighting real construction spending on new homes.
Companies dramatically scaled back as the Fed hiked rates but home builders have found that demand was much more resilient than anticipated due to low inventories. Rate buy downs have led to a strong year for home builders and going into 2024, they're likely to ramp up construction.
Notably, manufacturing and construction have particularly-strong economic externalities. If they can pick up next year as the services sector slows, it presents an upside risk to growth. Both those sectors are also commodity-intensive, which could also lead to pressure on inflation next year.
What's interesting is that both these sectors performed just as they should in a rising rate environment. It highlights that rates may have more of an effect, at least in the classic sense, in the 'hard' parts of the economy. Many of the models around central banking today were built in the 70s and 80s when manufacturing was a much larger part of the US and global economy.
