KEY DATA: ISM (Manufacturing): +2.9 points/ ISM (NonManufacturing): -0.6 point/ HWOL: -45,800/ Paychex: -0.24%
IN A NUTSHELL: “The economy continues to wander along at a steady, but not so great pace.”
WHAT IT MEANS: While there may have been fireworks across the nation last night, there is not much happening when it comes to the economy. The Institute for Supply Management (ISM) released its June manufacturing index results on Monday and its survey of non-manufacturers today. There was good news and not so good news. The manufacturing sector, which had been softening for quite some time, is continuing to show signs that the slowdown is behind it. The ISM activity index rose sharply, helped along by solid gains in new orders, production and as a consequence, hiring. Even so, order books continued to fatten at an accelerating pace. In other words, this segment of the economy is improving. On the other hand, activity in the non-manufacturing portion is moderating a touch. Demand is still solid, but is expanding a little less robustly. Still, hiring remains strong, as firms do what they can to meet their expanding backlogs.
On the labor market front, the indications are mixed. While both the ISM surveys point to strong job gains, the Conference Board’s Help Wanted OnLine measure showed that there were fewer ads for positions in June. The trend in this survey has been down for a couple of years and that may reflect the inability to find qualified workers. There was a sharp decline in listings early this year, but they have rebounded over the past few months to what look like a more reasonable level. A similar message, that the labor market may be softening, was seen in the Paychex IHS Markit June index, which dropped for the fourth consecutive month. Nevertheless, wage gains are accelerating. That may be a further indication that even if job growth has slowed, the lack of suitable labor is finally forcing firms to pay a little more for workers.
MARKETS AND FED POLICY IMPLICATIONS: The best news in the recent reports comes from the apparent improvement in the manufacturing sector. I say apparent because there is some concern for the vehicle sector. Sales were not particularly good in June and the trend is down. Some manufacturers have inventory well above desired levels. While that may lead to a little better than expected second quarter GDP, the pop from the inventory will be short-lived. Companies will likely start working off the excess stock of vehicles in the summer by slowing assembly rates. That would reverberate through their entire supply chains. But when all is said and done, we need wage increases to accelerate if growth is to improve. Friday’s employment report may provide some additional evidence that the tight labor market is forcing firms to actually raise wages. I don’t expect job gains to be great, somewhere in the 160,000-range, and the unemployment rate might tick up a touch. But if hourly wages accelerate, the rest of the report could be downplayed. Alternatively, given current below target inflation and mediocre job and economic growth, lackluster wage gains could lead the Fed to slow its rate normalization process.