KEY DATA: ISM (NonManufacturing): -0.1; Activity: +3.9; Orders: -1.0; Employment: -2.4/ Layoffs: -18%/ Claims: +6,000
IN A NUTSHELL: “With manufacturing stabilizing and the services sector still expanding, it should be clear to most that the recession fears were overblown.”
WHAT IT MEANS: The services sector has kept the economy going during manufacturing’s down period and while it is not booming along, it is still growing. The Institute for Supply Management’s NonManufacturing index eased just a touch in February, but the details didn’t confirm a major slowdown. The business activity/production index jumped, indicating firms are doing better. Yes, the new orders index eased, but orders are still increasing, just not as quickly. But there was one cautionary number. The employment index went into the red. Since most of the jobs come from services, this creates some concern that tomorrow’s job number may not live up to expectations.
Challenger, Gray and Christmas reported that layoff announcements in February were down from the January total but up from February 2015. The energy sector continues to hemorrhage positions. This is a lagging indicator, since it takes a while for layoff announcements to turn into actual job cuts. So, looking outward, the high level of announcements would seem to point to slower job gains in the months ahead. Looking backward, layoff announcements trended downward during the end of 2015 and that bodes well for the February jobs number.
Unemployment claims edged up last week but the four week moving average is still extremely low and well below the 2015 levels. This report also points to a decent payroll rise in February.
Finally, fourth quarter 2015 productivity and costs numbers were revised and came in better than expected. Of course, that is because everyone was expecting some really ugly numbers. Instead, they were just simply bad. Productivity fell “only” 2.2% instead of 3% while labor costs rose “only” 3.3% instead of 4.5%. A pick up in growth this quarter is likely to cause those numbers to change dramatically when we get the first quarter 2016 data.
MARKETS AND FED POLICY IMPLICATIONS: Most, but not all the data we have gotten in the past few weeks have been a little better than expected. Even today’s numbers surprised on the upside. That doesn’t mean the economy is booming – it is not. But growth continues and given that trend growth is maybe 2%, we are still exceeding that pace. And since we only need at most 150,000 new jobs to keep the unemployment rate going down, we should get that tomorrow as well. What I think will be key to Fed thinking is the hourly wage number. It rose sharply in January as firms came through with announced increases in minimum wages. If we get anything decent in February, it would signal that wage pressures that we see building are not temporary. That would provide the cover for the Fed to start sending out messages that their desire to raise rates further will be met, and possibly soon. Indeed, the March 16 FOMC statement and Janet Yellen’s press comments after the meeting could be more hawkish than people expect. But let’s see tomorrow’s report before we decide that rate hikes are coming.