Tags: Service | Growth | Hiring | economy

Slow Service-Sector Growth Clashes With Hiring Data

Thursday, 05 Jul 2012 01:04 PM

INDICATOR: June Supply Managers’ Non-Manufacturing Survey

KEY DATA: ISM Non-Manufacturing: Down 1.6 points; New Orders: Down 2.2 points; Employment: Up 1.5 points

IN A NUTSHELL: If the economy is slowing so much, why is hiring picking up?

WHAT IT MEANS: If you believe the nation’s purchasing managers, and I do, then the economy is growing at a pretty modest pace. That point was reiterated with the decline in the Institute for Supply Management’s index of non-manufacturing activity, which fell more sharply than expected in June.

The big problem, as it was with the ISM manufacturing index, was that new orders are disappearing. As a consequence, order books are thinning and production gains are slowing. Those are not good signs for future growth.

Yet at the same time, hiring has ramped up. Indeed, the percentage of firms reporting higher levels of employment was matched only once in the past seven years. It was exceeded only once in the past 15 years.

That is really hard to understand if the economy is really spiraling downward. Rising imports are another indication that there are some underlying issues that are driving some of the components that may not be purely fundamental in nature. To wit, new orders may be falling but is it because firms are seeing demand decline or that they are worried about future slowdowns? It matters which is the explanation.

MARKETS AND FED POLICY IMPLICATIONS:
This was another report that hangs out the warning flag that the economy is in the midst of a pause. But I say pause rather than protracted slowdown as some of the data just don’t jive.

It’s easy for firms to stop hiring and they can do that on a dime. So why did the labor market numbers improve in the non-manufacturing sector and remain above the average for the past year for the manufacturing sector?

I get it when orders grow but hiring falls: Firms are just not confident that the new demand is real. But when orders fall and hiring rises, that makes no sense at all unless firms are indicating they think the slowdown is not real.

Is that what is being said here? If so, the spring slump may be coming to an end. Regardless, tomorrow is employment Friday and those numbers will drive thinking for weeks, so let’s wait a day. If job gains are better than expected, then I will revisit this theory. Otherwise, forget what I just said.

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2012-04-05
Thursday, 05 Jul 2012 01:04 PM
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