KEY DATA: ISM (Manufacturing): +1.9 points; Orders: +3.3 points; Employment: -0.1 point/ Construction: +1.8%; Private: +1.4%; Public: +3.0%
IN A NUTSHELL: “Manufacturing activity is soaring and construction is starting to boom, so why are people doubting that the economy is finally switching gears?”
WHAT IT MEANS: I hope everyone had a wonderful weekend but summer is unofficially over and it is time to get really serious about the economy. While some may think I am suffering from heat stroke, I really do think we are closing in on escape velocity. Manufacturing activity continued to accelerate in August, according to the Institute for Supply Management. The most eye-opening part of the report was another surge in new orders. We are talking about really strong order growth here. As a result, companies ramped up production, also to a high level. Despite the growing output, order books filled and that means production levels could continue expanding. About the only negative component of the report was the employment index. It eased a smidgeon. However, there is still a lot of hiring going on. Despite the problems in Europe, export orders grew, a sign of that U.S. firms finally get it when it comes to world trade.
We got another indication that construction will be adding to growth this quarter. Construction spending soared in July. The increases were spread across much of the economy. In the private sector, nonresidential activity jumped even more than residential. But for me, it was the pick up in public construction activity that was most noteworthy. Government has been the biggest roadblock to growth, restraining spending and hiring. That is clearly changing. We saw an increase in state and local government activity in the second quarter and hiring is starting to grow again. Now we see that governments are back in the building business and they are even investing in schools again. Amazing.
MARKETS AND FED POLICY IMPLICATIONS: It is the week that contains Employment Friday so anything that comes earlier tends to be downgraded. But the robust manufacturing report, one that was well above expectations, makes it clear that the economy is hitting on almost all cylinders. It also provides some substance to my expectation that we will get really strong numbers on Friday. My payroll increase is just north of 275,000 and we could see a gapping down of the unemployment rate to 6%. Neither are consensus numbers but that is my story and I am sticking to it. If my forecast does indeed happen, there could be some real screaming at the Fed. There are a number of very anxious inflation hawks out there waiting for the right time to show their talons. But right now, that is just conjecture. We still have three days before E-Day. As for investors, the improving economic environment should be good for sales. But it also may mean a sooner than expected rise in rates and growing pressure on wages. Which trend will rule is a good question and I am not sure anyone can answer that right now. We will have to wait and see.