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.