The services sector, which dominates the U.S. economy relative to manufacturing, grew at a modestly faster pace in February, the Institute for Supply Management reports. The ISM non-manufacturing index rose to 57.3 from 56.8 in January, reaching the highest level since March 2011. Any reading above 50 equates with economic growth and so higher levels imply a strengthening expansion. Today’s news is clearly another reason to remain optimistic, although this is hardly an all-clear signal that blows away other risk factors. Nonetheless, the services sector overall employs most of the labor force in the U.S. and so we have another data point for thinking positively about Friday’s jobs report.
For good or ill, the stakes are quite high for the February employment report. Indeed, nothing less than a strong rise is needed to soften the potential blowback from the ongoing slowdown in the annual growth rates of personal income and spending, which has been a concern on these pages for months--a "troubling trend," as I called it in January. The deceleration is high on the list of worries for other analysts as well, including John Hussman of the Hussman Funds, who reminds that the deceleration in the year-over-year growth rates of consumer spending and income is looking increasingly threatening. The slide in real personal consumption growth, for instance, has fallen to 1.5%--a level "that we have simply never observed historically except in connection with recessions."
The rise in the ISM non-manufacturing index, on the other hand, suggests that job growth will roll on. In a note to clients today, economist Ed Yardeni tells us to expect no less. Friday’s jobs report "could well exceed expectations, confirming that the economic expansion is no longer ‘jobless,’" he writes.
During the previous two economic recoveries there were lots of concerns that not enough jobs were being created, which raised nagging fears that the economic upturns might not be self-sustaining and could stall out. So this is the third jobless recovery. We expect that it will end the same way--not with a recession, but with a pickup in employment that should permit self-sustaining growth. We think we are already there, based on the past two months of strong employment reports, and we expect this to be confirmed by a much-better-than-expected report for February and solid upward revisions for December and January.
The recent decline in new filings for jobless claims suggests that payrolls could post a tidy gain for February, but this idea isn’t wholly convincing to Hussman. "While we know that payrolls and new claims for unemployment are actually lagging indicators, not leading ones, we still generally see new claims for unemployment creeping higher before recessions, unlike today," he writes. "So from our standpoint, the essential question is whether the improvement in job growth negates the evidence from leading indicators, and from coincident indicators that are now at year-over-year growth rates also associated with oncoming recessions. As uncomfortable as it is to contemplate a renewed economic downturn, the weight of the evidence still leans to the leading indicators and coincident growth rates." The smoking gun, Hussman continues, quoting from the latest warning via the Economic Cycle Research Institute:
… downturns in job growth lag downturns in consumer spending growth, which is very clearly in a downturn. That's the sequence: jobs growth follows consumer spending growth, not the other way around.
It may be different this time, if job growth is sufficiently strong. Maybe that’s hoping for too much. But it’s a sure bet that if the labor market stumbles, the odds that the economy can keep out of trouble fall sharply. On that note, the consensus forecast tells us to pare our expectations for Friday’s jobs report, via Briefing.com. February’s non-farm payrolls will rise by 220,000, or down modestly from January’s 257,000. If so, dismissing the slowdown in spending and income isn't going to get any easier.