Manufacturing bouncing back

INDICATOR: June Supply Managers' Manufacturing Index

KEY DATA: ISM (Manufacturing): 50.9 (up 1.9 points); New Orders: up 3.1 points; Employment: down 1.4 points

IN A NUTSHELL: "Manufacturing is bouncing back but without more hiring it is not clear the economy can pick up much speed."

WHAT IT MEANS: The spring slump may be coming to an end, I hope. Manufacturing activity seems to be on the rise as the Institute for Supply Management's index of activity now shows that the sector is growing rather than contracting. The report was pretty good as orders and production both moved from the red into the black. Export demand was surprisingly strong and imports were up solidly as well. Firms are stocking more inventories, hopefully in expectation of greater growth. But there were also some cautionary numbers. Hiring was weak with fewer companies indicating they were adding to their workforces. The index, which has been coming down for two years, turned negative for the first time since September 2009. That is not good news as we need more hiring and greater income growth if this economy is to accelerate. In addition, order books continue to thin. It will be hard to maintain the gains in production if backlogs disappear.

MARKETS AND POLICY IMPLICATIONS: Despite problems in Europe and China, the U.S. economy continues to grow. It looks like a rebounding manufacturing sector will help keeps things on the upswing. But the pace is not anything great and with job gains not at a level where income growth would be strong, the economy needs some help. Exports are not likely to lead the way so we have to fall back to what we do best, which is to spend. But that cannot happen if wages and salaries continue to be so tightly controlled. In addition, if the sequestration effects worsen during the summer, as expected, we could be in for another quarter of mediocre economic activity. The hope is that with the deficit narrowing sharply, maybe the drive to cut government spending no matter what the cost will wane. Ending sequestration in the new budget that begins in October rather than continuing it could provide the energy needed to get us over the hump. But first there is the June employment report that comes out on Friday. Will anyone be watching the day after July 4th? Got me. Regardless, it should give us an indication about wages and income and that is what I will be watching most closely when the report comes out.