KEY DATA: ISM (NonManufacturing): +2.8 points; Orders: +3.4 points/ ADP: 163,000/ Layoffs: 38,472/ Claims: -10,000
IN A NUTSHELL: “Economic momentum remains strong, even if third quarter growth may be somewhat less robust than in the spring.”
WHAT IT MEANS: “When supply managers talk, economists listen”. No, purchasing professionals are not EF Hutton, but they are at the forefront of the economy. Well, this week they opened up and it looks like business conditions are really good. On Tuesday, the Institute for Supply Management reported that manufacturing activity rose solidly in August, led by surging orders. Today, they released their non-manufacturing numbers and they show that the service sector is booming as well. New order rose sharply, causing employment to rise. Despite a sharp rise in activity, deliveries slowed and order books swelled, indicating that this sector should continue to expand solidly for months to come.
Tomorrow is Employment Friday (my name) and prior to that release we get the ADP estimate of private sector job gains. The employment services firm number came in lower than expected. There was a robust job increase in manufacturing but a moderate increase in the services component. While mid-sized firms added workers like crazy, large and small firms hired more cautiously. It looks like there was a good summer tourism season as leisure and hospitality payrolls surged. Keep in mind, this report tends to do a good job of following the government numbers over time, but in any given month it can be off significantly. ADP’s estimates of private sector job gains over the last six months averaged 187,000. This seems more reasonable than the roughly 230,000 that we will likely average once the August numbers are released.
Challenger, Gray and Christmas found that layoffs were up in August, when compared to both this July or August 2017. This was the third month this year that layoffs were higher than the year before, which is quite odd given how strong the job market has been. Keep in mind, these are announcements, not actual cuts and they don’t indicate where in the world the downsizing will occur.
Jobless claims fell to the lowest level since November 1969. When you adjust for the size of the labor force, it is the lowest on record. It is hard to believe how few people are being cut given these data include not just typical layoffs but also business closings and downsizings. It is clear the last thing firms want to do is let people go and that is the clearest sign that the labor market is drum-tight.
MARKETS AND FED POLICY IMPLICATIONS: The data are clear: This economy is soaring. Yes, the widening trade deficit and weakening vehicle sales point to more moderate headline third quarter GDP growth. But when it comes to the business sector, there seems to be little or no marked slowdown at all. The issue is not where we are now, but how do we sustain the current growth pace through next year. That will depend upon better consumer spending, which means wage increases will have to accelerate, and stronger business capital spending, which means some of the money will actually have to start buying machinery, equipment and structures. That could happen, but as the saying goes, “we shall see”. I expect the August job gain will be in the 185,000-range. Firms are finding people to hire and holding onto employees, but payroll increases above 200,000 is not likely sustainable.