INDICATOR: June Supply Managers' Manufacturing Index and May Construction Spending

KEY DATA: ISM (Manufacturing): +1.5 points; Orders: -0.2 point/ Construction: +0.4%; Residential: +0.8%/ Ads: -51,000

IN A NUTSHELL: “Robust industrial activity should keep the economy strong for quite a while.”

WHAT IT MEANS: With trade issues starting to slowly, but steadily spiral out of hand, we need to know if the key sectors can withstand the potential problems that a trade war could bring. Last week we saw that household income, especially wages and salaries, was not growing significantly. Today, though, it became clear that the industrial sector is in very good shape. The Institute for Supply Management reported that its manufacturing index rose in June. Orders continue to increase sharply, though not quite as quickly as they had been. Still, the expanding demand was large enough to force production to rise and order books to continue to fill (though also less rapidly). Both producer and customer inventories are low and that bodes well for future production. Finally, hiring continues at a very solid pace as well. All in all, it looks like the manufacturing sector should be able to lead the way for the rest of the year.

It is also looking like construction is starting to accelerate. Activity jumped in May, led by a surge in residential building, both private and residential. Office construction was also up sharply. However, excluding office, nonresidential construction was weak, which is something that needs to be watched. The economy needs a broad based strong construction to help offset any weakness that the trade battles may create.

MARKETS AND FED POLICY IMPLICATIONS: Can the U.S. economy withstand the counter-tariffs being put on by Europe, Canada, Mexico and China as well as the higher costs created by our tariffs? Right now, given that the level of the tariffs is not huge, it looks that way. That is not to say some industries will not be hurt badly or that growth will not slow, but unless things deteriorate further, a recession will not likely follow just from the current trade skirmishes. However, the longer the tariff mini-war continues, the greater the damage and the slower the economy will grow. That is causing investors to lose some of their exuberance and maybe even creating some caution in the market. But this week contains Employment Friday and some of the concerns about the future course of the economy could be either dispelled or heightened, depending upon the size of the report. The consensus is for strong gain in the 200,000 range. I don’t think that is likely. However, I do think the wage number could be hotter than expected. That would create worries. 

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.