Category Archives: Supply Managers’ Non-Manufacturing Index

January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

INDICATOR: January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

KEY DATA: ISM (Non-Manufacturing): -3.1 points/Employment: -0.7 point/Orders: -0.7%; Capital Spending: 0%/Home Prices (monthly): +0.1%; Over-the-Year: +5.5%

IN A NUTSHELL:   “The economy hardly ended the year with a bang, but only because the recent pace was not sustainable.”

WHAT IT MEANS:  It would be great if we could get a string of five percent growth rates, but the likelihood that the third quarter pace will be duplicated anytime soon is not great.  What would be good is if the economy eases only modestly and that looks to be the case.  The Institute for Supply Management’s December index of non-manufacturing activity fell solidly, but there is no reason to worry.  Yes, just about every component posted decent declines, but the levels also matter and they are still pointing to decent growth.  That is, the services sector is coming down from extremely high levels to more sustainable and solid levels.  Indeed, hiring continues to be strong and dropped the least of all components.  The one change that does cause a little concern is the sudden shrinkage in order books.  The thinning was modest, though.

As second indication that the summer’s breakneck pace is cooling was the drop in durable goods orders in November.  Interestingly, while these data are usually really volatile, there was no sector, except defense aircraft, that posted either a large change.  As for business spending, executives continue to be cautious, as capital goods orders were flat after having dropped the previous two months.  I guess a strong economy is not enough to get firms to invest in the future.

Housing prices look like they have finally stabilized.  The year-over-year increase had been slowing for quite some time but we the latest data are indicating the drop is largely over.  CoreLogic’s November index showed a rise in both the monthly change and the yearly increase.  Every state and 96 of the top 100 metro areas posted increases since November 2013.

MARKETS AND FED POLICY IMPLICATIONS: The quarterly GDP growth rates always bounce around even when conditions are great.  The summer’s 5% pace was way above expectations but we really are not sure what trend growth will look like.  I think we can expand at or above 3.5% this year.  Consensus is around 3%.  As long as energy prices don’t spike, consumers will have lots more income to spend and the likely gains in wages will only add to purchasing power.  Ultimately, businesses will recognize that the U.S. economy has turned the economy and investment will rise with that epiphany.  Think about it.  The Conference Board’s CEO Confidence Index declined in the third quarter even as the economy was soaring.  So who knows what drives thinking in the corner office?  Maybe executives are more worried about the rest of the world, which is clearly a concern.  But the U.S. is hardly a problem.  Regardless, we get the December employment numbers this Friday and that is what will likely drive investor and Fed thinking.  Don’t expect another job gain number anywhere near 300,000, but it should be decent and the unemployment rate could decline even if the participation rate rises.

November Supply Managers’ Non-Manufacturing Index, ADP Jobs and Help Wanted Online

KEY DATA: ISM: +2.2 points: Orders: +2.3 points; Employment: -2.9 points/ADP: +208,000/HWOL: +170,200

IN A NUTSHELL:   “The October lull was just temporary and it looks like the job market is getting better.”

WHAT IT MEANS:  Friday we get the “all important” November employment report but until then, we will be finding out from other sources how the economy did last month.  Right now, all signs are go.  It appears that the services sector pause in October was only to refresh, not depress.  The Institute for Supply Management’s Non-Manufacturing index rebounded sharply in November, led by a surge in new orders.  Similar to the ISM manufacturing report, export demand jumped, though service sector imports grew a little less rapidly.  Despite ramped up production, order books are filling more rapidly and that bodes well for future activity.  The only negative was employment.  But the index simply came down from a very high level to a high level so hiring is still solid.

I am still quite optimistic about Friday’s jobs numbers.  ADP estimates that November private sector job gains came in at a decent though nothing-great level.  Small businesses are hiring like crazy.  That is interesting as the Paychex/IHS Small Business Jobs Index fell in November, so I don’t know what to make of this.  There was some improvement in large firm hiring but that group needs to do more.  And more may be coming.  The Conference Board’s Help Wanted OnLine index jumped in November as the number of new ads surged.  Firms need more workers, but they don’t seem to be doing a good job filling the open positions.  That view was supported by the latest semi-annual survey by Dice Holdings, which indicated that “more U.S. companies are revving up hiring plans”.  Even if Friday’s report is not a huge one, next year is shaping up to be a great one for workers.  

MARKETS AND FED POLICY IMPLICATIONS:  Every day, we continue to see that economic conditions are not only good but they are getting better.  The labor market is tightening and orders are flowing in.  Meanwhile, businesses continue to hold the line on compensation.  Today’s revised productivity numbers indicate that there has been largely no gain in inflation-adjusted earnings over the past year.  That is good for earnings but bad for consumer spending.   Investors should appreciate today’s numbers as they point to a solid but hardly overheating labor market.  That implies the Fed may not be facing demands to raise rates anytime soon.  But the Fed members will be parsing Friday’s unemployment rate and the wages data.  Those are the key indicators and as long as wages remain reasonably well contained, the FOMC can dither. 

October Supply Managers’ Non-Manufacturing Survey, ADP Payrolls and Online Labor Demand

KEY DATA: ISM (Non-Manufacturing): -1.5 points; Employment: +1.1 points/ADP +230,000/Help Wanted: +11,700

IN A NUTSHELL:   “The electorate may be disappointed with the economy but the numbers are pointing to accelerating growth and a tightening labor market.”

WHAT IT MEANS:  The Democrats got shellacked yesterday and massive discontent with the economy was a key reason for the rout.  But politics is politics and it often has little to do with reality.  In this case, there are reasons voters are correct and reasons they are wrong.  First, the wrong.  Basically, economic activity continues to rise.  The Institute for Supply Management’s Non-Manufacturing Index fell in October, but it remains at a level that is consistent with solid to strong growth.  Importantly, especially with the October employment report coming out on Friday, the employment index continues to break out on the upside.  Few firms are cutting back and more are hiring, a good sign for workers.  New orders continue to grow, but a little less briskly, while production has come down from outer space to the stratosphere.  In other words, everything is moving ahead quite strongly, though maybe not at break neck speed.

Where the electorate was right, was their feeling that their own economic conditions are just not great.  As I have said, ad nauseam, it is hard to spend, or feel good about things, if your income is going nowhere.  But that could change soon.  The labor market is tightening at a rapid pace, and it looks like we get confirmation of that on Friday.  ADP’s estimate of private sector payroll gains came in higher than their number for September and that could mean we will see a very strong October job increase.  The strong rise occurred despite an almost nonexistent rise in large-business hiring.  This sector had been strong for quite some time, so I don’t know what went on.  A firming labor market was also supported by a solid rise in the Conference Board’s Help Wanted OnLine Index.  Firms are looking for lots of people and I suspect they are also hiring a lot more workers. 

MARKETS AND FED POLICY IMPLICATIONS: The sour view about the economy expressed by voters makes sense when you consider that few have seen their wages rise and many have seen their benefits cut and their copays surge.  The only thing that will change that situation is a labor market that forces firms to bid for workers.  Each month, we see more and more signs that labor shortages are starting to appear.  We are approaching full employment nationally, but in some areas, industries and occupations, that condition already exists.  It’s just that shortages need to be more widespread before wage gains will accelerate and benefit cuts will be reversed.  I suspect by the spring, the intransigence toward paying more will fade as job openings become so great that firms have no choice but to start raising offers.  We are not there yet, but the Fed members need to recognize that a rising wage environment is not that far away.  As for investors, any euphoria over the election results may have to be tempered by the simple fact that being in power means you have to actually try to govern, something that neither party has bothered with lately.

September Supply Managers’ Non-Manufacturing Survey and August Trade Deficit

INDICATOR: September Supply Managers’ Non-Manufacturing Survey and August Trade Deficit

KEY DATA: ISM (Non-Manufacturing): -1 point; New Orders: -2.8 points; Employment: +1.4 points/Trade Deficit: $40.1 billion ($0.2 billion narrower)

IN A NUTSHELL:  “With all components of the economy expanding and with exports growing, it should be no surprise that firms are hiring.”

WHAT IT MEANS:  The September jobs report was better than expected but it should not have been.  The economy continues to grow across the board.  The Institute for Supply Management’s index of business activity in the construction and services sectors may have moderated a touch in September, but the level is still quite solid.  New orders grew at a slightly slower pace but there was a sharp acceleration in export demand.  The level of demand is strong enough that firms are ramping up their hiring, something we saw in the payroll data.  That is helping keep backlogs under control and order books grew at a more moderate pace.

Despite issues facing so many countries, our trade situation continues to improve.  The trade deficit narrowed slightly in August, but the big story was exports: They rose to a new record level.  Okay, the gain was modest, but new highs are new highs.  The increase was driven by rising sales of capital and consumer goods.  There was a surprisingly large decline in both vehicle and farm exports.  The surge in energy production is allowing us to dig deeply in our petroleum deficit.  We sold a lot more services as well.  Our purchases of foreign goods also were up, but not greatly.  Jumps in aircraft and consumer goods demand outweighed declines in food, oil and vehicles.  The revitalized domestic vehicle sector is helping out here.  Adjusting for inflation, the deficit has narrowed sharply in the third quarter, implying that trade should add solidly to growth, which could be as high as 3.5%.

MARKETS AND FED POLICY IMPLICATIONS: Everything seems to be coming together, except wages.  The increase in payrolls is generating a solid rise in total hours worked and that, conjunction with some rise in wages over the year, is helping generate moderate income gains.  But if we are to really get consumers spending, we need demand to come not just from the new workers, but also from those already employed.  And that requires businesses paying the current workers more.  Understandably, firms don’t want to do that, especially since they have not had to for so long.  But with the unemployment rate coming down, scattered labor shortages are appearing in some industries, occupations and geographic areas.  There is little reason to think the decline in the unemployment rate we have seen over the past two years will not continue over the next year and that means by next summer, we should be at full employment.  If the Fed waits until it sees the whites of wage-inflation’s eyes to pull the trigger, it will be overrun.  But for now, firms will continue to hold the line and the Fed will continue to continue to keep rates low because of less than stellar growth, a strong dollar and low inflation.  As for investors, today’s numbers should ease some of the wounds they have suffered recently.

September Job Estimates, Help Wanted Online and Manufacturing Activity

KEY DATA: ADP Jobs: 213,000; Conference Board Help Wanted: -137,200; ISM (Man.): -2.4 points

IN A NUTSHELL:  “The economy doesn’t seem to have picked up any steam in September.”

WHAT IT MEANS:  We had great growth in the spring but that high rate doesn’t look to have been sustained as the summer ended.  Today’s string of September numbers were simply disappointing.  The ADP estimate of private sector job gains was okay, but below what we need to have for the labor market to really be strong.  Essentially, it looks like it was more of the same.  What this means for Friday’s number is unclear.  ADP believes that the private sector created about 415,000 jobs in the last two months.  The Bureau of Labor Statistics’ first estimate of August private sector payrolls was a modest 134,000 rise.  Barring a major upward revision to the BLS August number, to get the two in synch would mean job gains of at least 250,000.  As for the ADP report, small and large businesses hired solidly.  The softness was in the mid-sized sector.  Why?  That is anybody’s guess.  As an added insult to those of us who think that the labor market is stronger than perceived, the Conference Board reported that online want ads fell sharply in September.  The trend is still up but the data are bouncing around an awful lot.

On the manufacturing front, the sector continues to expand solidly, but maybe not as robustly as it had been.  The Institute for Supply Management’s September activity index fell led by a sharp deceleration in order growth.  Let’s keep in mind that this is a diffusion index and if you reach a high level of orders and stay there, the index actually goes down.  The level of the index is still very high, indicating that demand is strong, which can be seen in robust and expanding production.  Hiring, though, did moderate.  Let’s see now: Orders are flowing in, production is ramping up but job growth is softening.  Got it.  Maybe the shrinking of backlogs can explain that.

MARKETS AND FED POLICY IMPLICATIONS: The first estimate of third quarter growth will be released at the end of October, so we have a month to wait.  It looks like the economy continued on a solid pace during the summer but well off the 4.6% rate posted in the spring quarter.  The recent data have provided few signs that the economy is picking up steam.  It would be nice to get a few quarters in a row of north of 4% growth but I doubt we will get that for a while.  Third quarter growth should be closer to 3% than 4%.  But at least the last six months have been pretty good.  Growth in the 3.75% range is something we have dreamed about yet people are discounting it.  I think that says a lot about how we are evaluating the economy.  Meanwhile, investors are waiting for Friday’s employment report and watching Hong Kong and the dollar, so who know if even today’s numbers will matter much.  As for the Fed, it still is all about the labor market and that means Friday is the big day.  I am sticking to my stronger than expected forecast but the consensus is for something in the 220,000.  An average number will keep the pressure off Fed Chair Yellen, but only as long as the other data remain moderate.

Supply Managers’ Non-Manufacturing Index

KEY DATA: ISM: +2.7 points; Orders: up 3.7 points: Employment: +1.6 points

IN A NUTSHELL:  “The services sector is bouncing back rapidly and since that is the largest part of the economy, it looks as if strong growth is just about here.”

WHAT IT MEANS: To get to rapid growth, you need just about every component of the economy hitting on all cylinders.  True, you can have one or two smaller sectors soft and still get a quarter or two or robust gains.  But for strong activity to be sustained, you cannot have the big dog sitting on the porch.  That has been the case with the U.S. economy as minimal income gains have limited services growth.  That is changing.  The Institute for Supply Management’s Non-Manufacturing index jumped in July, rising to the highest level since December 2005.  Yes, 2005!  Supporting that gain was the Markit Purchasing Managers’ services sector index, which did ease a touch but was still near the record level that had been reached in June.  In other words, non-manufacturing firms seem to have turned the corner.  The rise in business activity was driven by surging new orders as thirteen of the sixteen industries reported gains.  Exports didn’t accelerate but import orders did.  With factory orders up by a robust 1.1% in June, it is clear that someone is buying lots of goods and now we see services as well.  The strengthening demand is translating into new hiring.  Inventories are growing, but minimally and that may lead to even more activity going forward, especially since backlogs continue to expand.

MARKETS AND FED POLICY IMPLICATIONS:  The economy has seemed poised to break out before and we have been disappointed so I will believe it when I see it, but the data are really pointing to strong growth.  The employment report was not as great as hoped for but the data don’t go in a straight line.  Don’t be surprised if the August gain is above consensus.  But even with the less than hoped for rise in payrolls and the modest increase in the unemployment rate, the labor market situation remains positive as unemployment claims are at levels not seen in forty years.  Since both manufacturing and non-manufacturing accelerating, it is likely that the labor market will tighten further.  But wages will likely remain restrained as businesses still don’t think they actually have to raise compensation.  It may take a jump in employee turnover before the reality strikes home and we may not see that until much later this year.  Regardless of the timing, it is coming and the Fed is going to have to deal with it.  Chair Yellen seems to believe that she can wait until she sees the whites of wage inflation’s eyes until pulling the trigger so don’t expect a whole lot of talk about rate hikes for a while.  But that discussion, as well as information about how and when the Fed intends to shrink its balance sheet, needs happen in the public view soon.  The Fed has done great work in getting the economy to this point and now we have to know how it intends to unwind the crisis-based policy it has been operating under for the past seven years.  As for the markets, who knows what investors are worried about right now?  While this report should be positive, that doesn’t mean the markets will look at it that way or even consider it an important aspect of today’s trading

June Supply Managers’ Non-Manufacturing Index and Weekly Jobless Claims

KEY DATA: ISM (Non-Manufacturing): -0.2 points: Orders: +0.7 point: Hiring: +2 points/Claims: 315,000 (up 2,000)

IN A NUTSHELL:  “The service sector remained solid in June and with orders strong, that should continue.”

WHAT IT MEANS: Normally, the Institute for Supply Management’s surveys take center stage, but on a day where we got a huge employment report, this is probably a tree falling in the forest: It makes noise but few hear it.  The service sector grew in June but not quite as strongly as it had been over the previous few months.  Still, two key components of the index, new orders and employment, rose solidly.  Indeed, the orders index is quite high, indicating that not only has there been no slowdown in demand, but activity should accelerate in the months to come.  Firms are gearing up for that as their hiring is increasing.  We saw that in the payrolls number.  This bodes well for job gains going forward.  But this was not a uniformly strong report.  Business activity eased and backlogs grew more slowly, so we may not be seeing a rapid pick up in activity.

Also lost in the employment report was the weekly jobless numbers.  Claims inched upward but the level is still consistent with payroll increases in the 225,000 to 250,000 range.  I suspect we will stay at that job gain pace during the summer and accelerate in the fall and winter.

MARKETS AND FED POLICY IMPLICATIONS:  It was a good day for economic numbers.  The economy is indeed as strong as I have been arguing but not as strong as we want.  But that time is coming and sooner rather than later.  The equity markets should be focusing on the better growth not the coming jump in interest rates, but rationality and efficiency are two vastly different things.  Markets are efficient, not necessarily rational.  That said, we have been sent into the July 4th weekend with lots of things to celebrate, so let me end by simply saying:

Have a Great July 4th Weekend!