– by a New Deal Democrat
Today is the final day of a very weak week of economic news. One element worth noting is the relative health of consumer purchases of goods versus services in this pandemic recovery, as it appears to be unique.
Let’s start with the ISM non-manufacturing report that was released on Tuesday. Unlike the manufacturing report, which slightly returned to expansion after two months of mild contraction, the non-manufacturing parts of the economy were still growing strongly in August, if not at their boom levels of last year:
The overall index level was 56.9, expanding and a completely normal level for the past 15 years. The new orders index (not shown) was 61.8, indicating strong growth.
As stated, the ISM manufacturing index showed that the goods sector has been at a complete standstill for the past few months. Worse, a measure of real (inflation-adjusted) manufacturing and trade sales showed a year-over-year contraction through June for the 4th straight month:
As you can see, going back 60 years, with the sole exception of 2019 and two months at the end of 1989, this has *always* signaled a recession. Not good.
This is the sell side of the coin. Now, let’s look at how this happens on the other side of the coin, ie. personal consumer spending on goods and services.
“Real” PCE for goods has indeed declined since spring 2021; but for services they still increase:
Measured on an annualized basis, similar to real sales data, when real spending on goods went negative, there was usually a recession (note: I’ve split the data into 2 segments over 30 years for clarity):
Exceptions are large slowdowns that are not quite recessions, eg 1966-67, 1986-87, 1996.
Here’s a close-up of the last 3 years:
Note that the year-over-year decline lasted only 2 months and has since recovered. This is most consistent with a non-recessionary slowdown or, at worst, a barely-barely-recession since 2001.
The above uses the PCE price index as the deflator. Since 2002, there is also a chain deflator. Here’s what that data looks like:
The year-on-year decline in goods was sharper and lasted 4 months, but turned positive in July, while the services indicator remained very positive, albeit declining.
Indeed, when we combine real spending on both goods and services, we see a slowdown – to be fair, similar to that in 2007 – but no decline as during the last 2 recessions:
The bottom line here is that there is reason to believe that what we are mainly seeing is a shift from spending on goods at the height of the pandemic (ie Amazon deliveries to your door) to spending on services now that the restrictions are almost all were picked up. In other words, not a recession, at least not yet.