December Manufacturing Activity and November Job Openings and Quits

KEY DATA:  ISM (Manufacturing): -2.4 points; Orders: -1.1 points; Prices: -14.2 points/ Openings: -529,000; Quits: +370,000

IN A NUTSHELL: “Growth may be moderating, but workers still see this as a great time to find other jobs or even other things to do.”

WHAT IT MEANS:  Yes, the economy is no longer growing at an unsustainable pace, which is good news.  So, don’t worry too much about the moderate decline in December manufacturing activity reported by the Institute for Supply Management.  Indeed, there was some good news in the details.  First, the level of overall growth is still strong, and orders continue to expand at a very solid pace.  As a result, hiring accelerated and order books fattened.  Those point to continued improvement in the economy during the early part of this year.  But the eye-opening number was the prices paid component, which dropped sharply.  We could be starting to see some moderation in the rise in production costs. The index is not pointing to low inflation, just lower inflation. 

Job openings dropped sharply in November, though it is hard to argue that the labor market is faltering.  The level is not that much below the record high reached in July, and nearly matched in October.  To put things in perspective, the pre-pandemic high, which was set in November 2018, was 7.5 million.  The November level was nearly 10.6 million – almost forty percent above the pre-pandemic peak.  There are a ton of jobs openings, and workers are taking advantage of it.  The number of people quitting reached a new high and is about twenty-five percent above the pre-pandemic peak.  It is likely the number of workers quitting will rise a lot further during the first half of this year.     

IMPLICATIONS:  Delta took its toll on the economy in the late summer/fall, and it is looking as if Omicron is doing the same now.  But that doesn’t mean the economy is falling apart, it is not.  All that is happening is growth is decelerating from the unsustainable rate we saw when economy was reopening and the government was shoveling money out to businesses and households at an incredible pace.  Remember, when something is unsustainable it usually means there are excesses being created that lead to issues in the future. And we have seen that, especially when it comes to inflation.  So, more reasonable growth is good.  The first positive sign of that is the moderation in manufacturing cost increases.  Expenses are still rising rapidly, so don’t look for a major easing in inflation, but at least the increase is decelerating.  As for the labor market, employers are not getting any relief.  The level of unfilled positions is extraordinarily high, and workers are getting very comfortable with changing jobs or just plain quitting.  Hiring is robust and layoffs are extremely low, so the excess demand is not going away.  Friday, we get the December employment report, and it should be solid.  What I will be watching is the wage component.  The supply managers may be seeing a moderation in raw material costs, but if wage gains are still accelerating, inflation is not likely to slow significantly anytime soon.  If the November Paychex Small Business Wage Index is at all on target, hourly wage gains should be strong again.