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.