Challenges Ahead: Order Books Hold Key to Preventing Recession as Contradictory Data Puts Pressure on Federal Reserve

Order books need to turn around quickly to avert recession

Now at least in the manufacturing report we saw the employment component rise to 51.4 from 50.5, yet the payrolls report said manufacturing employment fell 2000. We saw private sector employment rise 257,000 in that same report, yet the ISM has service sector employment in contraction territory at 49.2!

 

The data contradictions underscore the challenge for the Federal Reserve and only support the argument that they leave policy on hold in June to try and get a better gauge of what is happening in the economy. The decline in price pressure is a welcome development though with the manufacturing prices paid below the break-even 50 level at 44.2 and service sector prices falling to 56.2 from 59.6. This leaves the service sector price index at its lowest level since March 2020 and slap bang in the middle of its long run range.

 

It looks likely that the manufacturing sector is already in recession (seven consecutive sub-50 readings for ISM manufacturing). The service sectors order books are weak and will need to turn around rapidly to prevent the service sector joining it. Given this situation it is difficult to imagine that employment will continue to make such large gains. Then with price measures rapidly weakening it is understandable that markets doubt that if we do get a pause at the June Federal Open Market Committee meeting that the Fed will be able justifying a restart on rate hikes later in the year.