A Macro View: ISM Reports March…Signs of Trouble that start with I and J
Mon, Apr 11, 6:25 PM ET, by Ron Rutherford, Sabrient.com
Labor Markets
The most recent ISM reports (March 2011) were overshadowed by the Employment Situation Summary from the Bureau of Labor Statistics. Calculated Risk provides graphs that show the long-term statistics on unemployment rate, participation rate, and employment to population ratio. Interestingly enough, the employment participation rate was unchanged at 64.2% last month, but it still shows the trend is downward and well below the normal rate of around 66 to 67%. But the employment to population ratio increased slightly on a sideways trend. Even economists that normally do not follow the jobs reports were giddy with excitement. Arnold Kling recalled Fed statements from the early 1980s when Fed Governor Lyle Gramley said, “When recovery comes, it really comes!” Kling’s predictions before the release of the report stated the following: Here is how I would judge the economy, based on how average job growth comes out: < 50,000 jobs per month: really bad news, the economy is still stuck in the doldrums. Between 50,000 and 150,000 jobs per month: slightly positive. > 150,000 jobs per month: finally, a recovery is here! Based on following the ISM reports, it was reasonable to expect at least 150k increase, but the rise in the private sector by 230,000 is much appreciated. Both of the ISM reports showed slower growth in the employment index by sliding 1.5% and 1.9% to 63 and 53.7 percentages points for manufacturing and non-manufacturing respectively. The manufacturing employment index is still strong above 60, but since non-manufacturing is the bulk of any increase in employment, its drop of 1.9% is of serious concern if we continue to expect healthy job reports. To get America back to work we need job reports of over 300k, especially considering how many discouraged workers are on the side-lines as well as the vast pool of immigrants that desire to work in the US. The graph below shows the monthly non-manufacturing employment index along with the trend line. (Click on tables for clearer images.)
Over the last 16 months, the trend line has only marginally dropped 0.02%, but last months drop was disappointing nonetheless. This could translate into lower employment report numbers. The manufacturing employment section announced that the usual industries reported decreases in employment while around a dozen experienced employment growth. The unusual aspect this month was that Wood Products and Petroleum & Coal Products were decreasing. According to some of the reports we have shown earlier, these areas have previously shown continuous increases in employment over the long-term—they have consistently been among the strongest employment sectors in the economy. Headline Numbers and Expectations
The headline numbers for both the Manufacturing ISM Report {PMI} and the Non-Manufacturing ISM Report {NMI} showed a slower rate of growth with a drop of 0.2 and 2.4 percentage points respectively. Manufacturing remained in the respectable range above 60 at 61.2%, while non-manufacturing {NMI} had significantly declined 2.4% to 57.3%. Thus it missed MarketWatch’s NMI consensus by almost 3% at 59% and was even below the consensus range that Econoday reported for Thomson Reuters of 57.7 to 68.8%. The consensus they gave was the exact number as last month which meant they expected no change. The consensus range for the NMI by T-R is usually broad and skewed as is the manufacturing consensus range also. This month, T-R reported the consensus range for PMI as 59 to 62.5% with the “mean” consensus as 61.2% showing a negative skewness—the mid-way point should have been 60.75%. NMI had a wider range, over 11%, reported as 57.7 -68.8%, with a mean of 59.7%, resulting in a large positive skewness. Concerns Going Forward
A new concern going forward is what the effects of Japan’s crisis are going to have on the economy and markets here and globally. As I have noted before, this could be an opportunity for new and existing businesses to gain market share, but it comes with costs. While this crisis can only result in a net loss, it does provide opportunities for first movers and those not affected by the events. The first market signal of the crisis in Japan surfaced in the JMMA, Japan Manufacturing Purchasing Managers Index (PMI), as it fell to 46.4 last month from 52.9% in February. Other numbers were just as bad because they fell under the 50% mark that signified contraction instead of growth. For example, the output index dropped drastically to 37.7 from 53.9%, new export orders dropped under 50 at 49.5 from 54%, and also new orders dropped drastically from 54.3 in February to 39.6 last month. {Japan Economy: Japan March Manufacturing PMI Hits 2-Year Low After Quake – CNBC} Anthony Nieves, who issued the Non-Manufacturing ISM report, summed up some of the major concerns in the following portion of his statement along with some of the comments from respondents. Anthony Nieves: Respondents’ comments reflect concern about the recent natural disasters in Japan and the associated supply chain ramifications. Additionally, there is concern over rising costs, most notably for fuel and fuel products. Overall, most respondents remain confident about the direction of the economy. Non-Manufacturing Respondents:
“Business is steady. Very concerned about high fuel costs and the speed of any Japanese recovery.” (Agriculture, Forestry, Fishing & Hunting) “The catastrophe in Japan is severely affecting supply chains for magnetic media.” (Management of Companies & Support Services) “Stockpiling Japanese products due to anticipated loss in capacity.” (Responses to Inventory Questions) Manufacturing Respondent:
“What will be the impact to the U.S. supply chain after the devastation caused by the Japan earthquake?” (Chemical Products) The above passages allude that prices are the major concern. While it is good that the price index for non-manufacturing declined 1.2%, it remained above the 70 mark at 72.1%. And the manufacturing price index continued its upward trend rising 3 points to hit 85% which was the highest reading since July 2008. The most recent local trend started in November 2010 at 69.5, but the longer trend started in June 2010 at 57%. Even more significant is that all industries in both reports are reporting higher prices! The ratio of respondents noting higher prices to those reporting lower prices is also heavily tilted toward higher prices with non-manufacturing being 51 to 2 and manufacturing comes in as 72 to 2. However in June 2010, the manufacturing ratio of those experiencing higher prices to those with lower prices was 32 to 18. Along with the index being high, crimping profits and hampering economic expansion, the sections on commodity prices in the reports also portend greater levels of inflation. Most of the numbers I watch on this section of the reports are on an upward trend. The only exception is that the total number of commodities up in price for the non-manufacturing report was 37 instead of 41 from February’s report. Manufacturing continued to get more consecutive months commodities at 22 up from 21 in February and 15 in January. Total number of commodities with rising prices was 37 last month compared to 30 the month before. Consecutive month commodities for non-manufacturing continued to increase its number to 23 last month up from 19, 14, and 7 for the months of February, January and December respectively.
Conclusion and Tinbergen’s Instrument Targets Rule
There were two major concerns that the latest ISM reports highlighted for the US economy: the effects of the events happening in Japan and the price levels that lead to inflation. The first one, we can only try to create opportunities for everyone including the Japanese in rebuilding their society and economy. The second one must be managed in the US by the various actors (government officials). It would be nice to live in Paul Krugman’s world where once in a liquidity trap, we never, ever have to worry about inflation. Our one and only concern should and must be unemployment. Certainly that is important, but if we are to tackle more than one problem at a time we should consider what policy instruments most likely to accomplish that task. Or as the Mundell’s principle states, “Policies should be paired with the objectives on which they have the most influence.” Unemployment is a major concern now but inflation as noted in these reports could become an issue here shortly. The Tinbergen’s instrument targets rule tells us under this criterion, the US needs to use monetary tools to control inflation and Fiscal tools to help reduce unemployment. But at the same time if the inflation is headed higher and UE is being slowly reduced then the instruments may need to be more in sync and be more coordinated. Going forward, even the Paul Ryan plan would ensure a fiscal stimulus for years to come, and well beyond the business cycle downturn. Ultimately, this might be the time to start to reign in spending.
SDI Glossary: "price" Definition
SDI Glossary: "Risk" Definition
SDI Glossary: "Stock" Definition
SDI Glossary: "Support" Definition
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