Supply managers exuberant

INDICATOR: July Supply Managers' Non-Manufacturing Survey/Conference Board's Employment Trends

KEY DATA: ISM (Non-Manufacturing): up 3.8 points: Orders: up 6.9 points/Employment Trends: up 0.5 point

IN A NUTSHELL: "If the nation's purchasing managers have it right, the economy is busting out."

WHAT IT MEANS: The people at the frontlines of businesses are the supply managers and boy they seem to be exuberant. Last week, the Institute for Supply Management's manufacturing index came out and it surged. I urged caution about that since the vehicle sector didn't follow its usual summer shut down pattern. But now we get the view of those who work for non-manufacturing companies and those people seem to be just as optimistic. The ISM non-manufacturing index jumped with orders and business activity rising sharply. Yet there were the same oddities in the non-manufacturing survey as there were in the manufacturing one. Hiring, which is continuing, did so at a slower pace. Also, backlogs are disappearing. That is not something you want to see if you are looking into the future. It would be a lot better if order books started ballooning. Add to that the indication that growing inventories are not what businesses want and there is a question about what will happen to business activity and hiring over the next few months.

With job gains seemingly moderating, assuming Friday's jobs report was correct, the outlook for future growth would not seem to be great. We need strong payroll increases that drive down the unemployment rate and trigger better payroll gains if consumers are to spend more money. The Conference Board's Employment Trends Index rose again in July to its highest level in about five years. That holds out hopes that job gains will improve.

MARKETS AND FED POLICY IMPLICATIONS: The ISM report was impressive. It provides some support for the robust manufacturing results and if accurate, points to a rebounding economy. I just don't know. Clearly, vehicles demand is strong but we haven't seen indications that households are doing a lot of other spending. I want to wait until the July retail numbers come out next week before I conclude the spring slump is ending. Nevertheless, the two ISM reports, when taken together, should provide some comfort for investors who are worried that the slack created by the ultimate ending of quantitative easing will not be taken up by stronger economic growth. That said, I still believe it is still all about jobs. The Conference Board's report was heartening but that has to be reflected in real employment growth. Until that happens, I will remain cautious about growth.