KEY DATA: ISM (Manufacturing): +0.7 point/ ADP Jobs: +237,000/ Layoffs: +3,808/ Help Wanted: -144,300
IN A NUTSHELL: “Manufacturing is starting to recover and with job gains strong, the accelerating economy looks like it is picking up even more steam.”
WHAT IT MEANS: Today we had a data dump as everyone rushed to beat the long July 4th weekend. For the most part, the numbers point to a pretty solid economy and the potential for a very good payroll number tomorrow. Let’s start with the Institute for Supply Management’ June Manufacturing report, which rose to its highest level since December 2014. Yes, it is still below what we saw in the second half of last year, but rising is better than falling. Importantly, new orders are rising solidly and that is leading to better hiring. The report did have its warts. Production moderated, backlogs eased and export demand moderated. Still, this report furthers the belief that the industrial sector’s problems are fading.
As for the labor market, there was one really strong report and two warning flags. First, the good news. ADP’s estimate of June job gains was well above expectations. Small businesses are adding workers like crazy and mid-sized firms are hiring solidly as well. However, large companies, especially those with more than 1,000 workers are not adding to payrolls very rapidly. Mergers, acquisitions and the strong dollar are likely the reasons that these companies are not doing much. Still, the ADP number has been underestimating national job growth and if that pattern persists, we could be looking at an employment increase in excess of 250,000 (I have been at 252,00). It is also likely that the unemployment rate will tick back down to 5.4%.
While job gains should be strong in June, going forward, the increases may be more moderate. Challenger, Gray and Christmas reported that layoff notices rose in June and were up by 17% during the first half of the year compared to the same period in 2014. The energy sector has been the reason for the increase but the large declines seem to be behind us. But other sectors are still cutting and it is unclear why. Also, the Conference Board’s Help Wanted OnLine measure dropped, pointing to a slowing in openings. Still, job openings are extraordinarily high, so I don’t expect any major moderation in hiring.
MARKETS AND FED POLICY IMPLICATIONS: The economy has shifted back into solid growth mode. The strong payroll gains in the small business sector point to broad based growth. Wage gains have been solid and consumers have the means to spend. Clearly, they have the confidence to buy more. Yesterday’s sharp rise in the Conference Board’s Consumer Confidence Index clearly says that. The May construction report was also strong and that, in conjunction with a recovering manufacturing sector implies that all components of the economy are now moving forward. Greece may be dominating the news but tomorrow the jobs report will hold sway. A strong June jobs number would make it clear the economy can absorb a rate hike and the Fed can move at any time it wants. Indeed, a reasonable resolution of the Greek impasse could mean the green flag will go up at the July 28-29 FOMC meeting.