Manufacturing back, labor firming

President Barack Obama talks with Eric Phillips as he tours the Amazon fulfillment center in Chattanooga, Tenn., Tuesday, July 30, 2013. Obama came to Chattanooga to give the first in a series of policy speeches on his proposals for private sector job growth and to strengthen the manufacturing sector. (AP Photo/Susan Walsh)

INDICATOR: Supply Managers' Manufacturing Survey/Jobless Claims/Layoffs

KEY DATA: ISM (Manufacturing): 55.4 (up 4.5 points); Orders: up 6.4 points; Production: up 11.6 points/Claims: 326,000 (down 19,000)/Layoffs: down 4.2%

IN A NUTSHELL: "Manufacturing looks like it is back and with the labor market firming, the only thing left is for overall economic growth to accelerate."

WHAT IT MEANS: Wow. The manufacturing sector has been wandering around for the past year in a modest to moderate growth pattern. But something may have happened in July. The Institute for Supply Management's index of manufacturing activity surged to its highest level in two years. Orders and production skyrocketed and that led to stronger hiring. Imports accelerated and export demand was solid thought the growth pace moderated. But not all the details lined up. Order books thinned for the third consecutive month and it is hard to see how production and hiring can hold up if that continues. Also, the production index was the highest in over nine years. Are things really that good? The internals in the orders index were also not that great as the share of respondents saying demand fell was higher while those saying orders were up actually dropped. The seasonal adjustment factor for the summer turned it into a large rise and that raises some questions concerning the pattern of production. The vehicle sector is not operating in the same way, in terms of model turnover patterns, than in the past. Since vehicle production drives many supporting sectors, the increases in orders and production have to looked at cautiously.

On the labor market side, jobless claims dropped sharply to a level that is consistent with strong job growth. We will see tomorrow when the July employment report is released just how strong payroll increases were, but the moderation in layoffs in July, as reported by Challenger, Gray and Christmas adds to the feeling that tomorrow's number could be quite good.

MARKETS AND FED POLICY IMPLICATIONS: Yesterday we looked back at the spring and the GDP number was not pretty. Growth was modest and it came after even weaker gains the previous two quarters. So what do today's reports tell us about the economy in the summer? It seems to be getting better. Indeed, if the jobless claims numbers and ISM manufacturing index is sustained, we could see robust growth this quarter. I just don't see that happening. The jobless claims numbers are volatile and I have some questions about the supply managers' report. So let's enjoy the numbers, which I am sure investors will, but don't get too exuberant. There is a long way and a lot of data to go before the next Fed statement on September 18th and as we have seen so often, conditions or the data can change quickly.