US manufacturing / industrial production are expected to pin the tail on a host of poor data of late

Manufacturing / industrial production (IP) are expected to pin the tail on a host of poor data of late. Both series will fall by two ticks in September if consensus is correct, leaving on-year growth in IP at zero and mnfg growth per se at a not-much-better 0.9% YoY. Coming on the back of two months of deeply disappointing nonfarm payrolls, a further 3% drop in exports (adding up to 10 percentage points in total since February) and Wednesday's drop in control group retail sales, further contraction in the manufacturing/industrial sector would push the odds of Fed lift-off this year ever closer to nil. Even officials who have argued strongly for lift-off this year have couched their proclivities in terms of cooperative data inflow and NY Fed president Dudley yesterday became the first to publicly acknowledge that the data of late have disappointed.

Most of the weakness - or at least the recent weakness - is coming from the manufacturing / goods sector. Manufacturing is growing at a sub-1% on-year pace. Goods exports have fallen by 10% since February. Nonfarm payrolls in goods producing industries (GPI) fell sharply in March and for the past 8 months have run 75k/month below their 2014 average. Core PCE inflation has been falling for 3.6 years and the main reason is that the goods portion of it - accounting for one-quarter of personal consumption and 17% of GDP - has been in outright deflation for 2.6 of those years. While the strong dollar is being blamed, it only accounts for the poor export data since February. The other two years of outright (core) goods deflation owes more to weak domestic demand which has constrained GDP growth to a pedestrian 2% pace for the past five years.

It's not all about goods, however. The service sector ISM has fallen by 3.5 points since July to 56.9. The drop in nonfarm payrolls in August and September owes just as much to a fall in service sector payrolls as it does to the drop in goods sector payrolls. It is still possible that this particular drop in payrolls is simply volatility. But given the broader body of data, this too is starting to feel more like signal than noise. Meanwhile, service sector inflation is now falling. It used to run at a steady 2.3% on-year pace - that has fallen over the past year to 1.8%. Rather than propping up core PCE inflation, the service sector is now adding to its disinflation.

Four Fed officials are publicly against lift-off this year and Dudley now seems to be leaning that way too. Unless the data suddenly turn north, lift-off appears increasingly certain to be delayed until 1Q16, if not for longer.