Here we go again: Another batch of economic updates and another round of disappointment. That sums up the latest numbers released this morning via the ADP Employment Report and the ISM Manufacturing Index. In both cases, the trend has taken a turn for the worse. The bad news arrives on the heels of yesterday's discouraging trio of economic reports. Stepping back and considering the latest updates suggests that we've entered a nasty pattern for macro news.
Let's take a closer look at today's data releases, starting with ADP's estimate of private payrolls for May. Although the labor market continued to expand last month, it did so by the thinnest of margins, according to ADP. May's nonfarm private payrolls rose by a net 38,000 on a seasonally adjusted basis — the smallest gain since last September and a huge drop from April's 177,000 increase.
"A deceleration in employment, while disappointing, is not entirely surprising," ADP advised in a press release. "In the first quarter, GDP grew at only a 1.8% rate and only about 2-1/4% over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment."
The dramatic slowdown in ADP's estimate of job creation strongly suggests that Friday's employment report from the U.S. Labor Department will also disappoint. Indeed, the sharp decline in the ADP number is so far below the last government payrolls estimate that it's all but certain that this gap will close.
Consider the chart below, which compares the monthly net changes for the two series. The red line is the government's guesstimate of the private sector's job growth through April. The blue line is ADP's number through May. The wide gap between the two suggests that the arrival of fresh data from the government on Friday will bring additional news of a weakening labor market. The only question is by how much?
[Click all to enlarge]
Moving on, today's update of the ISM Manufacturing Index presents a similar case of expecting trouble as May's economic updates are released later this month. The ISM Manufacturing gauge is among the first out of the gate each month, and this time it's signaling a new bout of weakness in the macro trend.
The second chart compares the rolling 12-month percentage change for the ISM Manufacturing Index with the comparable data for U.S. stocks (S&P 500), industrial production and new orders for durable goods. Only the S&P 500 and ISM numbers are updated through May 31; the other two indicators run through April 2011.
The point is that the ISM year-over-year trend has a fairly encouraging history of anticipating major turning points in the broad economy. For instance, the annual pace for this ISM benchmark bottomed in December 2008. The index's subsequent rebound offered an early sign that the economy's contraction had also hit a trough and that the end of the recession was near.
But that was then. Unfortunately, this ISM index (black line) is now falling on an annual basis — the first 12-month decline since the recession ended. Not a good sign.
On a positive note, the stock market's annual pace through the end of May is still predicting economic growth, as indicated by the S&P 500's 23.5% price gain over the past year (red line in the chart above). The question, then, is whether the ISM Manufacturing Index is the better indicator of what lies ahead. Or should we look to the stock market as a superior source of forecasting the macro trend? Judging by today's sharp selloff in stocks for the first day of June, it's a bit harder to shake off the implied message in the ISM data.
The economic weakness of late isn't a total surprise. Recall that the Treasury market's falling inflation forecast last month suggested that new trouble was brewing for the macro outlook, as we discussed here. It's still unclear if the change in the trend has legs, or even if what we currently know about May at this early date will spill over into other economic reports in the weeks ahead. For the moment, however, it's clear the economy is stumbling. The great unknown is whether the stumble will be contained.