Friday, April 01, 2011

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)

Prices are the other major concern going forward as the above passages allude to. 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 majorly tilted toward higher prices with non-manufacturing being 51 to 2 and manufacturing comes in as 72 to 2. In June 2010, for example, manufacturing ratio of those experiencing higher prices to those with lower prices was 32 to 18.

Along with the index being high and crimping profits and thus 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, which are the effects of the events happening in Japan, and the price levels and thus inflation. The first one, we can only to and 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 especially 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 it as, "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 under 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.




PS: The one component that is preventing the vicious cycles of inflation are that wages are not rising significantly.

Price index: M11-85, Feb11-82, Jan11-81.5, Dec10-72.5, Nov10-69.5, Oct10-71, Sep10-70.5, Aug10-61.5, Jul10-57.5, Jun10-57, May10-77.5

Market Watch:
Manufacturing: 61.3%
Non-Manufacturing: 59.0%

Econoday Report: ISM Mfg Index April 1, 2011

Econoday Report: ISM Non-Mfg Index April 5, 2011

David Smith's EconomicsUK.com: Manufacturing growth slows

David Smith's EconomicsUK.com: Service sector strong, Chambers of Commerce downbeat

Economics - Prospects for the UK Economy - Madrid Presentation

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in March

U.S. Service-Sector Growth Slows - Real Time Economics - WSJ

The Transmission Mechanism for Quantitative Easing (Wonkish) - NYTimes.com

Links to Sources:
Economic Calendar - Bloomberg

ISM - ISM Report - Report on Business

Economic Calendar

Economics Roundtable


Misc. Links:
Germany is competitive on a relative basis as measured by productivity, standard of living or prices | Angry Bear

Calculated Risk: FOMC Minutes: Some Disagreement, Worry about Oil Prices, No Tapering of QE2

CARPE DIEM: Housing Affordabilty Reaches New Record High

Eight Years to Get Back to Full Employment? - Real Time Economics - WSJ

Economists React: Upside Potential for Jobs Is ‘Tangible’ - Real Time Economics - WSJ

Growth: The manufacturing fetish | The Economist

America's recovery: The pieces are falling into place | The Economist

More Jobs Doesn’t Necessarily Mean More Good Jobs - Real Time Economics - WSJ

5 Questions About Today's Jobs Report - NYTimes.com

The Missing Sense of Urgency for Jobs - Real Time Economics - WSJ


CARPE DIEM: 15-Mo. Job Growth Returns to Pre-Recession Level

EMPLOYMENT SITUATION | Angry Bear

Stumbling and Mumbling: The Liz Taylor economic policy

The Capital Spectator: Private Sector Jobs Rise by 230k In March

Mish's Global Economic Trend Analysis: BLS Jobs Report: Nonfarm Payroll +216,000, Unemployment Rate 8.8%; Thoughts on the Jobs Report

Average Length of Unemployment Rises Again - NYTimes.com

Comparing Recoveries: Job Changes - NYTimes.com

5 Answers From Today's Jobs Report - NYTimes.com

Calculated Risk: Employment Summary and Part Time Workers, Unemployed over 26 Weeks

Hidden Bad Signs in a Good Jobs Report - Real Time Economics - WSJ

Video: Some Good News on Jobs Front - Real Time Economics - WSJ

Unemployment Rate Drops, Again, to 8.8% for March and that has some economists worried - The Curious Capitalist - TIME.com

Labour markets: Good but not great job growth continues | The Economist

CARPE DIEM: Female Gains Dominate Today's Jobs Report

Unemployment And Politics

Economics - Timetric: Unemployment in the US Economy

Unemployment And Politics

Women’s Earnings Are Stagnating - Real Time Economics - WSJ

Mish's Global Economic Trend Analysis: Rasmussen Poll: 57% Okay With Government Shutdown If It Leads to Deeper Budget Cuts

Even at March's Pace, Jobs Recovery Will Be Slow - NYTimes.com

Economics - Timetric: Unemployment in the US Economy

Welcome momentum in the labor market—but we need more

Econbrowser: The March Employment Situation Release

Why Investors Stopped Worrying About Japan - SmartMoney.com

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