September Non-Manufacturing Activity and Employment Trends
Economics in a nutshell: “Economic growth may be easing, but it is still decent, so job gains should be better than we have seen recently.”
INDICATOR: September Non-Manufacturing Activity and Employment Trends
KEY DATA: ISM (Non-Manufacturing): -2.1 points; Orders: -6.7 points: Hiring: +2.3 points/ Employment Trends Index: +0.1%
IN A NUTSHELL: "Economic growth may be easing, but it is still decent, so job gains should be better than we have seen recently."
WHAT IT MEANS: Job growth has seemingly slowed but that doesn't mean the economy is faltering. The Institute for Supply Management's Non-Manufacturing Index slipped in September and on the surface, that seems to indicate the economy did weaken last month. But if you look at the level of the index, it is still pretty high. Basically, the services and construction portion of the economy may not have accelerated in September, but it is still expanding. Indeed, the large decline in activity was not due to firms indicating conditions weakened. Instead, firms consolidated the gains from the summer and reported that activity levels were the same. I can live with that. The details of the report were a bit confusing. While new orders grew a lot less rapidly, import and export demand picked up. Also, hiring also improved and a smaller number of firms indicated they had cut their workforces. Backlogs keep building at a very decent pace and that could lead to additional hiring in the months ahead.
The Conference Board's Employment Trends Index rose a touch in September and that also points to decent hiring in the months to come. The increase over the year has slowed, but it is still in line with what we have seen over the past few years. The exception was the last three quarters of 2014 and first quarter 2015.
MARKETS AND FED POLICY IMPLICATIONS: Last Friday's employment was a disappointment, as long as you want strong growth. Investors, though, are back playing the "bad news is good news" game. What doesn't cause the Fed to tighten is viewed as positive and while I find that bizarre, it is the way it is. But today's reports don't indicate that hiring should have eased as much as BLS reported. Businesses outside manufacturing are adding workers at a solid pace and we should be seeing job gains above 200,000 per month. The employment numbers are volatile, but we have had two months of disappointing numbers. A third one would cause me some concern. Right now, I still believe that job gains will hold up and the unemployment rate will continue to fall, despite the problems created by the low energy prices and strong dollar. But the Fed has to see that happen, so we are back in "wait and see" mode.
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