KEY DATA: ISM (NonMan.): -2.3 points; Hiring: -4.1 points/ Layoffs: -31%/ Productivity: +3.1%; Labor Costs: +0.3%/ Jobless Claims: +7,000
IN A NUTSHELL: “The economic mixed messages tell us that growth is okay, but that’s about it.”
WHAT IT MEANS: One month things are up, the next they’re not and that seems to be the pattern in almost all the data. For example, the Institute for Supply Management’s Index of NonManufacturing activity fell in October after having surged in September. Interestingly, the index level is precisely the same as the average for the past twelve months. In other words, the services segment of the economy is growing moderately but is not accelerating. New orders grew more slowly, but that is only because they had jumped last month. Export demand eased a touch but imports were up. That makes sense given the U.S. economy is still doing better than any other industrialized nation. Order books continue to fill, so activity should be sustained going forward. Finally, the hiring index dropped sharply, but don’t take that as indicating job growth is faltering. The index was up a lot more in September than it dropped in October, so payroll gains in tomorrow’s employment report should be decent.
The labor market is still quite strong – and tight. Challenger, Gray and Christmas reported that layoff notices declined sharply in October and were down significantly from September 2015 levels. The total was the lowest October number since 1999, the end of the Y2K era. So far this year, layoff announcements are down over 14% and hiring plans are up over 8%, signs that the labor market continues to tighten. That view is supported by the jobless claims numbers. Though they were up last week, the level remains quite low.
Moribund productivity has been a major worry, but that seemed to have changed in the summer. Third quarter nonfarm productivity jumped as output was up sharply but hours worked rose minimally. As a consequence, labor costs were kept under control. Hourly compensation did increase at a solid pace, but so did production. While these numbers were great to see, it should be noted that there might be an issue with the seasonal adjustments. This is the fourth consecutive year that third quarter productivity posted a sharp increase from the second quarter number and the third year in a row that the third quarter number was the strongest for the year. These data do bounce around and a consistent pattern is an oddity.
MARKETS AND FED POLICY IMPLICATIONS: The Fed has spoken, so we can put to bed any rate hike discussions for a few more weeks. Janet Yellen’s term as Fed Chair doesn’t end until February 3, 2018 and she is going nowhere, regardless of the outcome of the election. Thus, expect her to do what she thinks is right, not what she thinks will get her reappointed. Fed Chairs just don’t operate any other way. But if Chair Yellen is hoping to see some really good economic numbers that would support a rate hike, she will have to wait at least another day. Today’s data simply reaffirm the belief that the economy is moving ahead at the pace that we have seen for several years now. With the October jobs report being released tomorrow, there is little reason for investors to go out on the limb.