Rutherfordian-Economics: A Macro View: ISM Reports March

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 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 and clearly on a sideways trend.

Even economists that normally do not follow the jobs reports were giddy with excitement. Like Arnold Kling recalled Fed statements from the early 1980s when Fed Governor Lyle Gramley stated that, "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 that 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 at above 60 but since non-manufacturing is the bulk of any increase in employment then its drop of 1.9% is of serious concern if we expect continuing good 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. 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 changed only marginally down at .02%, but last months drop was disappointing nonetheless. This could translate into lower employment report numbers.

The manufacturing employment section had the usual couple of industries reporting decreases in employment and the dozen or so with growth in employment. The unusual aspect this month was that the two were in Wood Products, and Petroleum & Coal Products. These areas have shown continuous increases in employment over the long-term as some of the reports we looked at showed. They were some of the strongest employment sectors in the economy consistently.

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 maintained its above 60 respectable range at 61.2%, 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 as the mid-way point should have been 60.75%. NMI had a wider range of over 11% reported as in 57.7 to 68.8% and the mean as 59.7% and thus a large positive skewness.

Concerns Going Forward
One new concern going forward is what are the effects of Japan's crisis going to have on the economy and markets here and globally. As I have noted before, this can be opportunities for new and existing businesses to gain market share, but this comes with costs. While this crisis can only result in a net loss, it does provide opportunities for the first movers and those not affected by the events. The fist signs of the effects of the events in Japan have surfaced in the Markit/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 by falling 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)