- This is a weekly series focused on analyzing the previous week’s economic data releases.
- The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening, and if the rate of inflation is increasing or decreasing.
- This week we examine the ISM and PMI Services and Manufacturing Indices, and the jobs report for May.
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PMI and ISM Services Indices
Markit’s US Service Index may have bottomed, but I think it is a stretch to describe the bounce in activity as V-shaped. The rate of contraction in business activity eased in May, as states reopened their economies, with the index rising from 26.7 to 37.5. The decline in output was primarily due to “weak client demand.” As a result, companies reduced headcount at nearly the same rate that they did in April. The degree of pessimism about the outlook moderated, as hopes rose that the worst is behind us. Yet social distancing measures are clearly taking a toll on business revenues, which is forcing companies to look for ways to cut costs. This will make it very difficult to see substantial employment gains until the coronavirus is contained and there is a treatment or vaccine that gives consumers confidence.
The ISM Non-Manufacturing Index contracted for a second month, rising from 41.8% in April to 45.4% in May. Again, no V-shape here. The business activity and new orders sub-indices realized the greatest improvement, but employment barely budged. The supplier deliveries index fell 11.3 points to 67, which is a positive, because it means that delivery times are speeding up as supply chain constraints ease somewhat. Still, this is nothing more than a dead cat bounce so far for the service sector.
PMI and ISM Manufacturing Indices
Markit’s Manufacturing PMI saw little improvement in May with the index edging up to 39.8 from 36.1. A continued weakening in demand and decline in new orders led to further declines in employment. Lower sales, temporary shutdowns and the inability to operate at full capacity because of new safety regulations will weigh on manufacturing in the months ahead. While the worst may behind us, this report still reflects the worst rate of business activity we have seen since the Great Recession, with the exception of last month.
The ISM Manufacturing Index inched higher to 43.1% in May from 41.5% in April, which also looks like nothing more than a dead cat bounce. The contraction in new orders was led by export orders, while backlogs also continue to see a sharp rate of contraction, despite weaker production. One positive is that inventories have returned to levels that should support an increase in production moving forward.
May Jobs Report
The jobs number was better than expected with payrolls rising 2.5 million in May, as low-wage workers on the front lines of the service industry were brought back to work (restaurants and retailers). Yet that barely puts a dent in the 20.5 million jobs lost in the prior month, and it doesn’t consider that revisions to the prior two months resulted in losses of another 642,000 jobs. Still, it makes for a nice V-shape in the chart below, which is what investors clearly see for the real economy. The problem is that it will take years to recover the jobs lost to date, and there will likely be a second wave of job losses in the months ahead, which isn’t being accounted for today. These will be higher-paying white-collar jobs that are eliminated as companies trim management positions. There are many support services provided to those industries hardest hit by the pandemic, and the companies that provide those support services have yet to downsize to what will be the new normal. Recessions have long tentacles, and this one will stretch far and wide.
The V shown above to report last month’s job gains looks a lot smaller when viewed in the context of the total jobs we have in the economy today. The unemployment rate was reported to have declined from 14.7% to 13.3%, but that number is flawed. The BLS classified three million workers as “absent from work,” instead of laid off. This mistake means that the unemployment rate rose to 16%. Despite the correction being made the same day, it was completely ignored.
If we account for the millions of self-employed small business owners who did not receive funds from the Payroll Protection Program, and who are not yet receiving enhanced unemployment benefits (approximately six million), I think a more accurate unemployment rate is 20%.
I shared this chart a month ago in this report. Since then, millions more have lost their jobs, yet the stock market has continued to soar to the extent that the S&P 500 has wiped out all of its losses for the year and the Nasdaq Composite is at new all-time highs. This is how the Federal Reserve and Chairman Powell support the economic expansion, which is why wealth disparity continues to grow, bubbles keep being blown and now protests have spread across the country. The unemployment rate and the stock market will realign as they did during the past two economic cycles, when the gravitational pull of the worst recession since the Great Depression brings the stock market back down to reality.
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This article was written by
Lawrence is the publisher of The Portfolio Architect. He has been managing portfolios for individual investors for 30 years, starting his career as a Financial Consultant in 1993 with Merrill Lynch and working in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. In addition to writing for Seeking Alpha, he is also a Leader on the new fintech platform at Follow.co.
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