KEY DATA: ISM (NonMan.): -3.8 points; Orders: -6.6 points; Employment: -2.7 points/ Manufacturing Orders: -0.1%; Backlogs: +0.1%/ Layoffs: 41,557/ Claims: +4,000
IN A NUTSHELL: “The manufacturing sector is contracting but the service sector is still expanding enough to keep growth at a modest to moderate pace.”
WHAT IT MEANS: While few economists, including myself, expect a recession to start this year, next year is a different story. Whether we do wind up in one will depend upon the service sector as the trade war has already claimed its first major victim, the manufacturing sector. Thus, we need to watch carefully the trend in services. Right now, it is slowing, which should surprise no one. The Institute for Supply Management’s NonManufacturing Index fell sharply in September, but that came after a surprisingly large rise in August. The September level, though, did drop a little below the July number, meaning all of the August gain, and more, was wiped out in September. The business activity, new orders and employment components were all off sharply. In addition, prices paid for goods and services rose even faster, not a good sign for either inflation or earnings. The report, though, was not all doom and gloom. Backlogs increased and that holds out hope that the easing in growth will stabilize in the months to come.
Speaking of manufacturing, orders for all types of products declined in August. While demand for durables rose a touch, demand for nondurables fell moderately. That is a further sign that growth is softening.
As for the labor market, Challenger, Gray and Christian reported that layoff notices were down sharply not just from August, but also from September 2018. Still, so far in 2019, notices are still up nearly 28% from the first nine months of 2018. That is somewhat surprising given the shortage of workers. Restructuring, closing, bankruptcy and cost cutting explain about 65% of the layoff announcements, which makes sense given the issues in retail and other industries.
Jobless claims rose a touch last week but remain extremely low. MARKETS AND FED POLICY IMPLICATIONS:Yes, the economy is slowing. No, it is not in recession and there is no reason to believe it will go into the red this year. But it cannot be said that conditions are strong. Indeed, it will take continued strong consumer spending to keep the economy out of a downturn. Can households keep it up? That will depend upon both job and wage growth. And that is why, when all is said and done, the key numbers are to be found in the monthly employment report. We get the September data tomorrow and consensus is for about 150,000 or so. The huge surge in government employment in August is likely to have been unwound in September and that makes it harder to get a handle on the headline number. So look more closely at the private sector job gains. In August, they came in below 100,000 but should be slightly above a September headline 150,000 number. That would be okay but nothing great. That is, it would be consistent with a still growing, but slowly moderating growth pace. But also pay close attention to the unemployment rate, which I think might tick up to 3.8%. That could worry investors. Another concern is wage gains, which should be at 0.3% over the month and 3.4% over the year. Failing to meet those increases would indicate earnings gains are moderating as well and that would be an even greater warning sign. As for investors, they cannot be happy to see the services sector slowing. But they can take hope that it is still expanding enough to keep the economy moving forward.