Negative data surprises yesterday and today have dealt a superficial blow to the view here that US economic growth is gathering pace. The surprises, however, are judged to be of minor significance and more than outweighed by August monetary data showing a further pick-up in narrow money expansion.

The first surprise was a drop in the Institute for Supply Management (ISM) manufacturing purchasing managers’ index to 49.4 in August from 52.6 in July. The new orders component was particularly weak, falling to 49.1 from 56.7.

The first chart compares the ISM new orders index with an average of current and future order balances in five regional Fed manufacturing surveys (New York, Philadelphia, Richmond, Kansas, Dallas). The ISM series had been stronger (relative to history) than the Fed average over the prior three months and appears to have overcorrected in August. The Fed series remained in expansionary territory last month and well above a low reached in May / June.


The second chart separates the Fed average into current and future components. The current component mirrored the weakness of the ISM new orders index in August but the future component rose to a 20-month high.


ISM weakness, therefore, seems partly to reflect statistical noise and will probably prove temporary.

The second negative surprise was today’s August employment report, showing smaller-than-expected rises in non-farm payrolls and average earnings, and a fall in average weekly hours. The payrolls miss, however, was minor and follows blockbuster gains in June and July: the three-month moving average rose to 232,000, the strongest since January – third chart.


Annual growth of hourly earnings of private production and non-supervisory workers edged down from 2.5% to 2.6% but the trend remains up, consistent with a high job openings rate – fourth chart. Earnings growth stood at 2.0% when the Fed hiked rates in December.


The above indicators are coincident (at best) measures of the economy. Narrow money trends are of much greater significance for judging prospects: changes in real (i.e. inflation-adjusted) narrow money growth have consistently led swings in GDP expansion in recent years. Weekly data through 22 August indicate that real money growth rose further last month to its highest level since February 2015 – fifth chart.


The view here remains that the Fed will raise rates before year-end, with a move this month still possible. The narrow money backdrop, moreover, is much stronger now than in December 2015, suggesting that a further increase will occur in early 2017 as economic growth exceeds Fed and consensus expectations.