All posts by joel

July Manufacturing Activity and June Construction Spending

KEY DATA: ISM (Manufacturing): +1.6 points; Orders: +5.1 points; Production: +4.8 points/ Construction: -0.7%; Private Commercial: -1.3%; Private Residential: -1.5% 

IN A NUTSHELL: “Manufacturing is bouncing back but construction activity remains hit or miss.”

WHAT IT MEANS:Manufacturing continues to improve, which is good news for the economy.  The Institute for Supply Management’s Manufacturing index rose solidly again in July and the details were mostly very good.  There were strong gains in orders, and despite a jump in production, backlogs have started to build.  That holds out hope that activity will continue to improve in the next couple of months.  Firms are also beginning to regain pricing power.  About the only negative in the report was the employment index.  While it was up, the level remains in negative territory, meaning that jobs are still being cut, though at a slightly slower pace.  There are few signs that firms are adding lots of new workers and that is a reason to believe the next set of job reports could be disappointing.

Construction spending fell in June, which was not a surprise.  The sharp drop in private residential activity was greater than expected and with the general economy only starting to reopen, nonresidential commercial construction also fell sharply.  Until it is clear where we are going, which could be months given the surge in the virus, don’t expect construction to pick up significantly.  Governments just don’t have the money to spend and businesses are hardly going to expand greatly if they don’t know whether demand will be there to pay off the costs.     

IMPLICATIONS: Given where we ended the second quarter, it is clear that third quarter growth will be huge.  Maybe nowhere near the second quarter decline, but impressive nonetheless.  How impressive, remains a question.  The next economic bailout bill is still to be passed and there are still people waiting for the checks they were supposed to get in the spring and workers who just cannot get on the unemployment rolls despite being unemployed for weeks.  The cut in the unemployment payments created by the political gridlock and miscalculations could show up in spending fairly quickly, but the rebound once the checks go out will likely take a lot longer.  So, August could be an ugly monthunless something happens in Washington soon – like two weeks ago.  Despite the fact that the economy cannot stand on its own, investors will probably continue assuming that Uncle Sam the Candy Man will continue providing everything needed.  And they could be right, at least until the election is over.        

June Income and Spending, July Consumer Sentiment and 2nd Quarter Employment Costs

KEY DATA:Consumption: +5.2%; Disposable Income: -1.8%; Prices: +0.4%; Ex-Food and Energy: +0.2%/ Sentiment: -5.6 points/ ECI (Over-Year): +2.7%; Wages (Over-Year): +2.9% 

IN A NUTSHELL: “Consumers were back out spending in June, but with the virus surging and confidence falling, July’s numbers may not be as strong.”

WHAT IT MEANS: Yesterday’s GDP report told us how bad things were during the spring.  But with the economy reopening, the data were a lot better as we ended the second quarter.  Most impressively, consumer spending soared.All categories of consumption posted sharp increases.  The key services component, which makes up about two-thirds of all consumption, cratered in the early spring.  It has come back with a vengeance.  Can that continue?  It is unclear.  After tax income, adjusted for inflation, fell sharply in June.  The reason is clear from the data.  Just about all the income gain during the quarter came from government transfer payments, i.e., unemployment compensation.  As people come go back to work, those numbers fall.  However, wage and salary gains came nowhere close to making up for the drop in government largesse.  The drop in income and the strong rise in spending led to a sharp reduction in the savings rate, but at 19%, it is clear that most households are still worried about the future and stashing away funds for the next rainy day.  Inflation picked up a touch, but it remains low on a year-over-year basis.

Speaking of being worried, the return of the virus has cratered consumer optimism.  The University of Michigan’s Consumer Sentiment index plummeted again in July.  What the reopenings did for confidence in June, the resurgence took it all away. The expectations index is at its six year low, set in May.  That does not bode well for future spending, as the virus is not going away soon.

Employment costs rose at a moderate pace in the second quarter.  Idon’t really know what to make of this report.  It seems to imply the shutdowns and reopenings basically changed little when it came to compensation.  Wages and salaries did grow more slowly than had been the case but benefits increased.  I am at a loss to figure that out. 

IMPLICATIONS: Household spending rebounded sharply as the economy reopened and we could see consumption growth well into double-digits for the third quarter. Whether that will happen will be determined by the virus, Congress and the president. It is clear from the income numbers that unemployment insurance was the major source of income for households, but the $600 per week add on has expired.  A failure to renew that payment or a reduction in the weekly amount will cut spending power sharply.  Keep in mind, over thirty million people receive unemployment checks, so any reduction will hit consumption hard.  The alternative is allowing the economy to stand on its own.  I suspect that next Friday’s employment report will be telling. My forecast is for job growth to be less than two million, compared to the 4.8 million gain posted in June.  I also expect the unemployment rate to rise. The virus has slowed, halted or in some cases reversed the reopening process and the private sector is nowhere near ready to go it alone.  So, don’t be surprised if we get another round of unemployment add-ons.  How much is unclear, but the negative impact on the economy of cutting the current amount and the simple fact that there is an election in three months, tells me that fiscal conservatism is not the highest priority of even fiscal conservatives.  I went into this process expecting the $600 to turn into $300, but it is likely to be higher – maybe even $600 again through the election. Survival is the mantra of most politicians.  But the political game of chicken (waiting until the last moment to offer a proposal) that caused the payment to lapse is likely to lead to a slowing in consumption until the money starts flowing again.  When you combine the surge in the virus with the stupidity in Washington and the massive divisions in the nation, it is hard to be optimistic about the economy achieving a sustained, rapid recovery.      

Second Quarter GDP and Weekly Jobless Claims

KEY DATA: GDP: -32.9%; Consumption: -34.6%; Investment: -49%; Disposable Income: +44.9%; Consumer Prices: -1.9%/ Claims: +12,000; Continuing Claims: +867,000

IN A NUTSHELL: “The record-setting economic decline was pretty much as expected but the more disconcerting news was the deterioration in the labor market.”

WHAT IT MEANS: Yes, the economy crashed and burned in the spring at a pace never before seen, or at least measured.  We (economists) knew it was coming and we warned it was coming, but the numbers were still breathtakingly bad.  Households stopped buyingas few people bought any services.  My local deli owner said her food business was fine but she owns a dry cleaner and no one was bringing in any clothes.  Not a surprise there.  Meanwhile, businesses put their investment plans on hold and spending on equipment and structures collapsed.  In addition, they stripped out all of their inventoriesas it made no sense to keep the warehouses filled if no one was buying.  On the trade front, our overseas sales plummeted but we bought even less from the rest of the world,so the trade deficit actually narrowed a touch.  About the only positive was government, at least the federal government. Spending on nondefense goods and services surged (as did the deficit).  On the other hand, state and local governments felt the pain of the shutdowns and cut back their spending sharply.  Prices fell solidly as well.  If there was a clear indication of the importance of the unemployment payments, it could be seen in the disposable personal income number: It rose at a nearly 45% annualized pace.  The only reason we didn’t have much larger decline in GDP was that we went from a capitalist economy to a social welfare economy with gusto.   

Looking forward, weekly unemployment claims rose for the second consecutive week.  Two is not a trend, but with the virus running rampant across much of the nation and the reopening of the economy largely on pause, we are likely to see that increase continue.  Over the past four weeks, roughly 5.5 million people were forced to file for unemployment insurance and that four-week moving average should to keep rising.  That raises questions about job growth in July.  

IMPLICATIONS/COMMENTARY: There were a number of key issues that were highlighted in today’s reports.  For the economy, it was not just the second quarter debacle but when you add in the decline in the first quarter, total GDP 10.6% below where it was at the end of 2019.  I took a lot of grief in April when I argued that it could take two years to get back to where we were, but I am even more comfortable with that forecast now.  As Fed Chair Powell noted yesterday, the virus will determine the course of the economy. A large portion of the public as well as many politicians simply refuse to deal head-on with the virus.Thus, we reopened too soon in many places and people refuse to make the sacrifices needed to keep the virus at bay.  But the business community is at fault as well.  The mouths that roar whenever they see a threat to their businesses have been silent about the threat the virus creates.  There have been few calls by the business community or their organizations to take the necessary actions to control the virus. And that is hurting, not helping, the recovery and their companies.The second issue is future course of the economy and the next bailout bill.  There are a variety of programs that support unemployed workers and when you add them all together, over thirty million people are receiving unemployment support.  Forget the unemployment rate, look at how money is being earned – it is by handouts.  The only way you have personal income rising in a collapsing economy is if you turn to a massive welfare economy.  That was absolutely necessary and if it didn’t happened, the decline might have been fifty percent or more.  This is the question Congress and the president must ask: How well is the economy capable of standing on its own?  With the virus largely halting the reopening, it is likely job growth will falter and the unemployment rate will rise.  With the government additional unemployment payment support now gone, income will be falling until a new bill is passed.  Yes, we have the largest welfare economy in U.S. history, but it was implemented to pay for current spending and keep us from a total collapse. If you cut that support and the problem facing the economy, the virus, remains out of control, well that V-shaped recovery could disappear.Congress and the president have to face the music and start dealing with the virus.  Otherwise, this welfare economy will be with us for a lot longer than anyone wants to see and the long-term negative impacts will be massive. 

July 28,29 ‘20 FOMC Meeting

In a Nutshell: “The path of the economy will depend significantly on the course of the virus.”

Decision:Fed funds rate target range remains at 0% to 0.25%.

The Federal Reserve made it clear today that there is no time limit on its intervention in the markets nor is there a limit on the amount of funds it can or will spend to keep the economy from faltering. That was expected and the Fed delivered.  But Fed Chair Powell also noted that the Fed can supply funds but cannot spend those funds.  Actually, the comment he uses is that the Fed “has lending not spending powers”.  Thus, its loan programs may not be right for all businesses.  Instead, Mr. Powell noted that additional direct funding on the part of the federal government might be needed.  In other words, he was hinting, quite strongly and clearly without saying so, that further fiscal stimulus is required.  As is usually the case with Fed Chairs, he declined to advise Congress and the president on what policies to continue funding or at what level.  He ain’t no fool!

What the Fed also tried to make clear is that the best economic policy is one that addresses controlling the virus.  He noted that the economy would not get back to previous levels until people feel comfortable being involved in all normal economic activities.  He commented that measures of consumer spending have softened since late June. The resurgence of the virus in June is having a real effect on household behavior and that is worrisome.  

So, what should we take away from the Fed’s actions?  First, the Fed is operating on the basis that this could be a long-term problem and is making it clear the monetary authorities are prepared to stay the course. That means interest rates will likely remain near record lows for an extended period.  The best way to look at this is in six-month increments, since we know little about the timing of vaccines or treatments.  So, rates will likely not be going anywhere for at least the next six months.  

But the reality is that the economy will not be getting back to where it was at the end of 2019 for eighteen to twenty four months, a point the Fed Chair made.  That implies the Fed is on likely on hold through next year and probably well into 2022.  The Fed will also continue its lending policies and much of its market intervention (bond and equity purchases) through next year as well.  When the Fed starts lowering its purchases, that will be a signal it is starting to see the light at the end of the tunnel.  

Ultimately, it is all about the virus and if we keep making mistakes that cause resurgences to occur, the economy will remain weak and support from both the Fed and Congress, will be needed.   

 (The next FOMC meeting is September 15,16 2020.) 

June New Home Sales

KEY DATA:  Sales: +13.8%; Northeast: +89.7%; Prices (Over-Year): +5.6%

IN A NUTSHELL:  “The highest new home sales pace in thirteen years shows that at least one segment of the economy is back up and running.”

WHAT IT MEANS:  Housing has been leading the recovery and it continues to do so.  New home sales soared again in June.  The pace was the strongest since July 2007.  It didn’t matter if a house was completed, under construction or not even started, buyers bought.  The gains, though, were somewhat unevenly distributed across the nation.  There was a near doubling in contract signings in the Northeast, a region that was crushed by the virus and has just really started opening up.  Clearly, there is a lot of pent up demand in the states in that region and it is being met.  But when a section that usually comprises maybe five percent of total sales accounts for about twenty eight percent of the new demand, you know there was a special situation.  Still, sales were up strongly in the other three regions, so this is a real recovery.  On the prices side, the cost of a new home continues to rebound back toward where it was before the recovery.  With demand rising and inventories falling, builders have every reason to be happy and keep pumping out new homes.          

IMPLICATIONS:   Next week we get the first reading on spring GDP and it should show the largest quarterly decline on record.  With the economy starting to, the June data, which are the starting points for third quarter growth, were well above April’s horrendous shutdown numbers.  So we should expect the summer quarter to post possibly the largest rise on record.  But the virus resurgence has raised questions about the extent of that increase.  The V-shape recovery true believers were looking for a percentage gain equal to about two-thirds to three-quarters the size of the decline.  But that is looking like an overly optimistic outlook.  Yesterday’s rise in new claims for unemployment insurance is likely to be the first of many increases if the virus remains at its current level, let alone increases in those states that have managed to keep it somewhat in check.  The PPP is starting to run out and firms that will now have to make money the old fashioned way (by earning it), will likely start cutting their workforces in order to survive.  And it is likely that the next business and household payments plan coming out of Congress will be significantly lower than the last one.  That can only mean many people will see their disposable income decline – and their consumption follow suit.  Where we go from here is anyone’s guess, but I think the third quarter is setting up to show disappointingly strong growth.  Yes, that sounds ridiculous, but if you were expecting growth to be in the twenty-five percent range and it turns out to be closer to ten percent, then it is really not great.      

All that said, the Phillies open up tonight.  Yes, I know, they are a long-shot, but baseball is back and I am a huge baseball fan, so until they are eliminated, all I have to say is:


June Industrial Production, Import and Export Prices, Help Wanted OnLine and July New York Manufacturing

KEY DATA:  IP: +5.4%; Manufacturing: +7.2%/ Import Prices: +1.4%; Fuel: +21.9%; Export Prices: +1.4%; Farm: +1.4%/ HWOL: +5.2 points/ Empire State: +17.4 points; Expectations: -18.1 points

IN A NUTSHELL:  “Manufacturing continues to improve as the vehicle sector starts to return to normal production levels.”

WHAT IT MEANS:  One thing about math, you can get some very amazing changes when you start with very low numbers.  Industrial production soared in June as the manufacturing sector reopened.  Leading the way was the vehicle sector, which had shut down almost completely in April.  Plants started reopening in May and then ramped up production in June to such an extent that half of the total manufacturing production increases in those two months came from rising assembly rates alone.  It is not clear that sales will continue to jump, so don’t expect the July vehicle or manufacturing numbers to look nearly as strong as they were in May and June.  Still, the story was not just SUVs.  Every single manufacturing group posted a gain in June.  That rarely happens.  Warm, not hot weather led to a surge in utility production, but oil and gas drilling continued to shut down.

Import prices, which had also cratered in March and April, are starting to rebound.  But most of the gain came from the recovery of energy costs.  Few other sectors showed significant gains.  With imported food costs rising modestly, there could be some easing in the price pressures that we have seen in consumer prices.  On the export side, farmers got some decent increases, but their prices are still down sharply over the year.

Firms are starting to hire again and that means they need to advertise, at least a little more.  The Conference Board’s Help Wanted OnLine index rose solidly in June and was back to 2017 levels.  That said, it remains well below the peak posted in January.

Not surprisingly, the New York Fed’s Empire State Manufacturing Index jumped in July.  This is a diffusion index, which we know changes dramatically with the economy reopening.  So let’s look at not just the index, but for me the key number, those reporting “lower”.  For the general business conditions, employment, production and new orders indices, that number remains in the mid-20% range.  That is still high.  The jobs index itself was largely flat while hours worked were still falling, though modestly.  Worse, expectations are beginning to react to the surging virus and are falling.

IMPLICATIONS:We are at a crucial point in the recovery.  The virus is getting out of control in a number of large states and new cases are even beginning to rise in most states that didn’t reopen early.  School openings are unclear, sporting events are being run without spectators, downtown office building remain largely ghost towns in many major cities and our politicians cannot decide what is the best way to proceed.  With federal guidance limited, local decision making down to school district levels is predominating.  The resulting patchwork process of safety and reopenings is showing signs of faltering.  I wrote in April that I expected a major decline in the spring quarter and a sharp, but not nearly as large rise in the fall.  That is likely to still be the case, though the third quarter gain could be less than many had hoped for.  It will still be record-setting, but not the nearly twenty percent rise that many forecasters expect (Blue Chip consensus is roughly 18%).  Forecasting economic data these days is much more daunting than in the past.  Even then, I often just had my award-winning cat pick a number.  As an economist who is a member of just about every major forecasting panel, I have to come up with numbers each week.  But truthfully, most of us are largely guessing.  Thus, when markets move on results that are above or below expectations, those reactions are irrational since the numbers often are based on models that don’t work well under the current circumstances.So, try not to get too excited by what seem to be good numbers or too distressed by bad ones.  Over time, we might discover that they were neither that strong nor that weak. 

June Consumer Prices, Real Earnings and Small Business Optimism

KEY DATA:  CPI: +0.6%; Ex-Food and Energy: +0.2%; Food: +0.6%; Energy: +5.1%/ Real Earnings: -1.7%; Over-Year: +4.3%/ NFIB: +6.2 points

IN A NUTSHELL:  “Inflation is not an issue unless you eat, drive and/or cool your house (yes, that is an oldie but goodie, but it still works).”

WHAT IT MEANS:  Almost fifteen years ago, I used the comment above to criticize the Fed for saying that inflation was not an issue if you exclude food and energy.  That caught the eye of at least one member of the Fed, Janet Yellen, who kidded me about it at a program where I received a forecasting award.  Well, sufficiently chided, I stopped using the phrase, but it is worth trotting out again.  For the most part, inflation is quite tame, as we saw in the June Consumer Price Index report. But as anyone who buys food knows, the costs of eating at home continue to rise pretty sharply.  They jumped again in June and are up 5.6% over the year. Meat, poultry and fish costs are up double-digit over the year, but most other food prices rose sharply as well.  Being the one who does the shopping in the house, I can testify that costs are surging and the supply chain remains frayed as well.  As for energy costs, the rise looks high, but prices are coming off the shutdown lows and they are still at moderate levels.  What was most outrageous was the June surge in cake and cupcake costs. I just don’t know what to do.

Though real earnings, or income adjusted for price changes, fell sharply in June, the gain over the year remains extremely high.  But these data have to be put in context (as is the case with most of the numbers).  The average wage is a weighted by the numbers of workers in each category.  With the lower paid hospitality, retail and service firm workers bearing most of the brunt of the layoffs, the weighted average increased.  As the economy reopens and these workers return, the average wage should continue to decline.  Thus, this is one report that sometimes gets press coverage but these days it shouldn’t. 

Small business optimism improved again in June.  The National Federation of Independent Businesses’ index has increased for two months now.  Firms are starting to hire back their workers and hope to hire more and, not surprisingly, expect sales to improve in the future.  But this report also has to be viewed with some caution.  The economy is reopening and of course payrolls and sales are rising, as are hopes that will continue.  But this report does not tell us about the level of employment or demand.  It says things are getting better, which is good, but not how good things are.

IMPLICATIONS:  The June reports are looking a lot better, but they don’t include any impacts from the surge in the virus across the nation and the beginnings of the retrenchment in the reopening process.  It is not clear that the July employment numbers will reflect what is happening as they are collected the week of the 12th and it may take a few weeks before the layoffs get measured.  That raises questions about what the July employment report will actually represent.  So watch the weekly unemployment claims and continuing claims numbers, as they are closer to real time measurements. If they start to rise again, and I expect that to be the case, then that will be an indication the recovery is slowing.  Another labor market issue to consider is the reopening – or not – of schools.  The timing, especially of hiring for the new school year, may impact the August data.  What I am saying is that the numbers may be collected correctly but they could be largely irrelevant.  That is what happens when you have huge changes occur in short periods of time.  When you couple that with the indices, that reflect direction not magnitudes, it is clear that we are flying somewhat blind right now.  We know things are getting better, but there is likely to be some big bumps in the road coming.  But it is also hard to know how good – or bad – things are and we may not know that for months.  So, don’t take the headline number seriously.  Look for trends and study the details, which is something I argue all the time but I felt needed to be reinforced right now.      

Weekly Unemployment Claims

KEY DATA:  Claims: 1.31 million (-99,000); Continuing Claims: 18.06 million (-698,000)

IN A NUTSHELL:  “The labor market has been improving, but the impacts from the virus resurgence could slow that progress.”

WHAT IT MEANS:  With the virus resurging across the nation, the focus of attention is turning toward determining how much of an impact it is having on the labor market.  Today’s unemployment claims report is not likely to contain very much information about that.  What it does is provide a baseline to compare to the next few weeks, when the effects of the shutdowns and slowing of the reopening will start to appear.  Whether the latest report is representative of that baseline is also in question as the July 4th holiday may have skewed the data somewhat

So much for the caveats.   Last week, the number of people filing new unemployment claims dropped solidly.  But as I remind everyone every week, the level is still incredibly high.  It is hard to say that 1.3 million newly unemployed people are a good number.  It is not.  Worse, it is high compared to the progress being made on the continuing claims front.  The number of people receiving unemployment checks dropped sharply last week.  However, the level was only half that the number that filed for unemployment.  It will be hard to sustain the solid declines in the unemployment rate and the strong job gains if that gap continues.  Since it takes time to go from claimant to recipient, the continuing claims numbers lag the new claims data, so don’t be surprised if the recent improvement slows.     

IMPLICATIONS:   Yes, the labor market is indeed getting better, but with states slowing and/or reversing their reopenings, the data could be nothing more than yesterday’s news.  I would be surprised if we don’t see new claims start to rise over the next few weeks.  More and more firms are warning of impending layoffs and that means many other firms are either ramping up more slowly or simply not filling open positions.  We have entered a period of rising uncertainty about the state of the recovery and companies are not stupid: Facing an inability to forecast future demand, the best thing to do is hire cautiously, if at all, or allow payrolls to decline organically.  Today’s data were good, but the see-no-evil markets need to look past those numbers and start asking the right question, which is: Where do we go from here?  Since the approaches to dealing with the virus are being made without central government guidance, the randomness of the approaches and the political undercurrents in which they are being made raise real concerns about their effectiveness.  Given the massive resurgence in the virus, it is hard to conclude otherwise.    

June NonManufacturing Activity and Employment Trends

KEY DATA:  ISM (NonMan.): +11.7 points; Orders: +19.7; Employment: +11.3 points/ ETI: +3.8 points

IN A NUTSHELL:  “Economic activity is coming back, but the jobs situation may not be as rosy as the employment report suggested.”

WHAT IT MEANS:  The reopening is picking up steam and spreading across many sectors of the economy (the impacts, if any, of the surge in the virus are not in most of the current data).  The latest report to show a huge gain was the Institute for Supply Management’s June Nonmanufacturing Index.   Orders surged, backlogs finally began to build again and overall activity skyrocketed.  But let’s remember, this is another diffusion index and that means we are getting direction not magnitude.  Still, in this case, up is always better than down.  But the employment index showed how changes in the indices could be misleading.  The measure jumped in June but is still showing that firms are cutting their workforces fairly sharply.  A quarter of the firms laid off workers while only sixteen percent added to their payrolls.  That is not good news for future employment reports.

Indeed, the Conference Board’s Employment Trends Index, while rising, remained extremely depressed in June.  The level was still down over fifty-five percent from the February reading.  The report included this warning, which I agree with: “In response to (the virus) resurgence, many governments have delayed or reversed their re-opening plans, which could lead to lower hiring. Given the possibility of less recruiting and the fact that layoff rates remain high (emphasis added), the upward trend in the number of jobs may not continue. The unemployment rate may plateau or even increase in the coming months.”

IMPLICATIONS:  Things are looking up when it comes to overall economic activity.  That is not surprising given that we really didn’t start reopening the economy until early to mid-May.  Investors are eating up every one of these good economic numbers, even if they don’t necessarily say the economy is in good shape.  Actually, none of them say that.  But they point to better times ahead.  The only thing that could slow that progress is a resurgence in the virus.  Oh, right, that is actually occurring.  So, how are the markets reacting?  Virus? What virus?  Investors are running around, hugging each other and partying, all without masks.  Will that lead to a further market sickness?  Only if you believe markets are rational.  The recent Congressional Budget Office update on the economy forecasted that GDP would not return to the fourth quarter 2019 level until spring 2022.  That is in line with what I suggested three months ago.  It will not get back to maximum sustainable GDP, which is the trend level of full employment activity, for nearly a decade.  At the end of 2019, the economy was running above that level.  As for the unemployment rate, the CBO expects it will not fall below 6% until the very end of 2024.  It was 3.5% in February.  In other words, for a lot of workers, happy days will not be here again for a very long time.  There are significant challenges ahead, even abstracting any additional virus-induced problems.

June Private Sector Jobs, Manufacturing Activity and Layoffs and May Construction Spending

KEY DATA:  ADP: +2.37 million/ ISM (Manufacturing): +9.5 points; Orders: +24.6 points/ Layoffs: 170,219/ Construction: -2.1%; Private: -3.3%

IN A NUTSHELL:  “Tomorrow’s employment report should be good, though there are some real questions about the May one that creates confusion about how strong it will be.”

WHAT IT MEANS:  Our first reading of the pace that the reopenings are bringing back jobs comes tomorrow when BLS releases the June employment report.  Today, the employment services firm ADP released its estimate of June private sector payroll changes and it was pretty much as expected.  Large gains were recorded across all sizes of firms, while most industries added to their workforces.  The only weak areas were information services, mining and management companies.  But the confusion about tomorrow comes from ADP’s May numbers, which showed that the job losses, not gains, were even greater than expected.  In essence, they doubled-down on their estimate that the economy did not add jobs, as BLS reported, but actually lost over three million workers.  As I noted last month, the ADP and BLS numbers sometimes vary greatly, but it is not normal that they have a different sign.  Thus, it is unclear if the government’s May numbers will be revised significantly and if that is the case, what that means for the June data.  So, stay tuned.

In line with so many other reports, the Institute for Supply Management’s Manufacturing activity index popped in June.  Orders and production surged, which hardly was a surprise.  But also consistent with previous reports, employment and backlogs continued to decline, though at a slower pace.  That does not bode well for employment or production. 

Disappointingly, construction spending continued to decline in May.  The government did its part in trying to get the economy going, but private sector housing and most components of nonresidential construction were off. 

Layoffs continue at a huge pace, but at least the number of announced cutbacks slowed in June.  Challenger, Gray and Christmas reported that June’s number was down 57% from the May total.  Still, the second quarter total was twice as large as the previous record that occurred during the crash in 2001. 

IMPLICATIONS: Tomorrow is a big day as we get both the employment report and the unemployment claims data.  It looks like we could have another multi-million job gain, though who knows what the revisions to May will look like.  Regardless of what comes out, the claims numbers cannot be an afterthought.  They indicate the extent to which companies and governments continue to shed workers.  We need to get those number down dramatically as it is clear the reopening is not going as planned – or at least as planned by the early-openers.  That has forced the more cautious governors and mayors to slow the process down.  By the way, how come no one is talking about how the hot weather will slow the spread of the virus?  The sharpest increases in cases have largely been in the hot weather states of Florida, Texas, Arizona, and California.  But with investors, bad news on the virus front is viewed as good news and anything that points to some progress on the vaccine front is considered to be fantastic news.  As one investment advisor mentioned to me, the strategy is simple: Invest.  With the Fed backstopping the markets, that worked quite well in the second quarter.