Thursday, December 03, 2009

Employment of One Man and the ISM Reports...

Just before bed last night, I was checking my emails for any alerts and found the following short note at Sen. Sanders to place hold on Bernanke nomination. It does not seem likely that Sanders will or can block Bernanke's nomination as the President already showed support for his nomination and Sanders can only delay the process some. And the markets reacted more when the Stocks pull back after ISM services index falls. From Sanders own newsroom comes:
‘He’s part of the problem’
A Senate panel this week will hold a hearing on Federal Reserve Chairman Ben Bernanke’s nomination to a second term in charge of the nation’s central bank. The appointment is subject to Senate confirmation. Senator Bernie Sanders said he will vote no. “The middle class of America is collapsing; we have seen incredible greed, recklessness and illegal behavior on Wall Street. This guy…missed the boat on the most significant economic crisis since the Great Depression,” Sanders said Monday on “Morning Meeting” on MSNBC. “We need a whole new direction in the Fed and in our economic policies. A direction that stands up for a change, not for the rich, not for the top 1 percent, not for the giant financial institutions, but for the working class and the middle class of this country. Nobody thinks that Ben Bernanke is that person.”

That is, other than the President and most of the Senate. One of his complaints that does seem to hold some water was Bernanke's handling of the TARP process but so many others were involved in that that it hardly can be blamed solely on the Fed Chairman. Some of his other complaints were the Fed did not "stop the casino-type activities of large financial companies", demanding bailed-out banks lower interest rates on credit cards, unemployment nearly doubled, and 120 banks failed.

ISM Reports
But let me put aside the problems on one person's employment or unemployment status and discuss the market as noted with the release of the ISM numbers for manufacturing released on Dec. 1st and non-manufacturing on the 3rd. {Links: ISM - Media Release: November 2009 Manufacturing ISM Report On Business®, ISM - Media Release: November 2009 Non-Manufacturing ISM Report On Business®} The manufacturing sector while still positive and growing for the 4th consecutive month was below consensus of 55 being 53.6 and below last months number of 55.7 indicating a slowing growth trend. Non-manufacturing overall index was disappointing as noted earlier by being below consensus expectations of 52 which would have been above the index level for last month of 50.6. Thus economists had expected a growing at a faster rate than the net result of 48.7 indicating a contraction of that segment.

New orders were maintaining its strong growth trend in manufacturing and in non-manufacturing sectors with the trend being growth for 5 and 3 months respectively with the current index at 60.3 and 55.1 respectively. This may be one reason for the continuing optimism for the consensus numbers we looked at earlier. Since we are talking about forward indicators of the economy, I think it might be worth looking briefly at the Architecture Billings Index (ABI) which provides a forward indicator to construction activity/spending. The index is like the ISM in that over 50 indicates expansion. The ABI was 46.1 up sharply from 43.1 in September and the good news was that the project inquiries index was 58.5 indicating strong interest for new project but follow through may be the issue until we see more "green shoots" of recovery.

Hat tip to Calculated Risk for the graphic at AIA: Architecture Billings Index Shows Contraction.

I know that the job market for architects has been dismal as it is reflected here in the West having the lowest regional averages with the South being the highest but still well below 50 meaning contraction. As I stated in earlier posts, I just do not see the construction sector providing the engine for growth going forward for some time especially to absorb the high levels of unemployment.

While the forward looking indicators looked positive for the ISM indexes, employment has not yet gotten traction. Although the manufacturing index was positive with an indicator of 50.8 it is down from the 53.1 in October. It must be noted that even though there are 6 industries reporting growth and 6 reporting decreases in employment the percentage of firms reporting increases is 17% while decreases is 18%. This does not bode well for continuing growth in employment but it is even worse in the non-manufacturing sector with the index of 41.6 which is above last month but is the 19 month trend of reducing employment and the 22nd time out of 23 times in negative territory.

Pass through costs and export segments.
The comments sections of both reports also show much caution looking forward including this noteworthy comment: "No one trusts that the recovery is real. Seems everything and everyone is in a holding pattern." (Public Administration) Even the manufacturing sectors did not respond positively to the reduced value of the dollar and were most concerned about increasing costs of imports. Prices paid for both sectors were in positive territory but non-manufacturing was clearly and significantly trending up with the latest being 57.8 while manufacturing price index dropped 10 points to 55. The last point is important to indicate inflation {and inflation expectations} remains subdued.

I have been suggesting in some of my blog posts that exports are a needed factor in our economic growth and a factor in unwinding the "global imbalances" so let us look at the numbers for imports and exports according to the reports. Net export orders are positive and trending up with the index 56 in manufacturing and 54.5 in non-manufacturing. Imports in the manufacturing sector is positive but lower index than the exports and non-manufacturing is below the 50 mark with 46. Both import indexes seem to be holding steady.

Since this post has thrown a lot of numbers around, I reproduced the graph from the ISM below:


David Brown has also noted that the markets have been sitting up and noticing the exchange rate as he noted in WTMW starting on November 16th at: Market in Strange Dance with the Dollar and Anticipating Black Friday.
Over the past several weeks, the market has seemed inversely tied to the value of the dollar. The dollar goes down, the market goes up; the dollar goes up, the market goes down. Generally speaking, the dollar has gone down, and the market has gone up.

In fact, today as I write, we have reached a new high for the year for the S&P500, the Nasdaq, the Dow, and just about anything you want to name. And sure enough, the dollar is down once again today.

Frankly, this inverse relationship between the dollar and the market is not that surprising since a weak dollar means more exports and fewer imports for the U.S. and higher material prices. That also explains the strength of large-caps over small-caps, since as general rule large-cap stocks have much more revenues from exports than small-caps. Clearly, most major natural resource companies are also large caps. At the November 7th G-20 meeting, the leaders had pledged to continue to support the recovery until it is assured, and that has led to a weaker dollar.


Looking forward.
There are some positive signs going forward but without some signs of employment improving then not likely that the equity markets can continue to be positive in its outlook. I still hope for a gradual decline in the value of the dollar accompanied by increases in exports/decreases in imports.
PS: More thoughts on Ben's nomination at WILL HE STAY OR WILL HE GO?

Links Misc:
AIA: Architecture Billings Index Shows Contraction

Angry Bear: Industrial Production
Angry Bear: The Mythology of the Future Job Market
Angry Bear: Vague Thoughts on The Theory of the Firm, the Business Cycle and Kurt Vonnegut
Could Advancing Job Automation Technology Cause Structural Unemployment?
------------------------------------

Delinquencies, foreclosures break record MBA: 14.41% of mortgages delinquent or in foreclosure in third quarter

U.S. Mortgage Market and Seriously Delinquent Loans by Type

Recent Developments in Mortgage Finance

California Controller: Overview of the Commercial Property Markets

Dominating the Narrative Arnold Kling

Yes, the federal government has a structural deficit. But let's keep it in perspective, shall we?


Bernie Sanders articles used:
Bernie Sanders Moves To Block Ben Bernanke's Confirmation

US Sen Sanders Attempts To Hold Up Bernanke Renomination

Sen. Bernie Sanders puts hold on Bernanke's 2nd term - Yahoo! Finance

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2:47 AM, December 09, 2009  

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