WHAT IT MEANS:
- INDICATOR: August Non-Manufacturing Activity, July Trade Deficit and Weekly Jobless Claims
- KEY DATA: ISM (NonMan.): -1.3 points; / Trade Deficit: $41.9 bil. ($3.3 bil. narrower)/ Claims: +12,000
- IN A NUTSHELL: “The U.S. economy is showing no signs of slowing down despite the problems in Asia.”
As we head into tomorrow’s “all-important” employment report, other data are painting the picture of a U.S. economy continuing to forward, even as stock prices bounce wildly. The services and construction portion is actually doing quite well.
Yes, the Institute for Supply Management’s reading of business activity for the non-manufacturing segment fell a touch in August. The level is still one of the highest we have seen over the past decade (July was the peak) and it beat expectations. New order growth eased just a touch and activity and hiring moderated, but order books still fattened.
Basically, activity was very strong but not quite as robust as it was in July. That is hardly a cause for concern.
The turmoil in China has raised questions whether our export growth can be sustained.
Well, so far, so good. Exports increased again in July, helping create a solid decline in the trade deficit. Almost all major categories posted gains, led by a solid rise in vehicle sales.
Foreign demand for our food, capital goods and industrial supplies also help up nicely. Our imports were down, though. That is normally not a good sign as it raises questions about domestic demand.
However, most of the drop came from 15% declines in pharmaceuticals and cell phones. Such a huge change in just one month was likely due to special factors, not economic trends. Imports of capital goods, industrial supplies and even consumer goods excluding those two industries were up.
There was also a large fall in food imports, but it is doubtful people suddenly went on a diet because the economy weakened. Meanwhile, we bought lots of foreign vehicles, a sign of economic strength. Adjusting for inflation, the trade deficit started off the quarter down so maybe it will not restrain growth much this quarter.
Two other releases point to continued tight labor market conditions. Weekly jobless claims popped a bit last week, but the level is still in the strong job growth territory.
Challenger, Gray and Christmas reported that August layoff announcements fell sharply from the defense cutback elevated July level. So far this year, layoff notices are up 31%.
However, the entire rise could be assigned to increases in defense and the oil sector, which are special situations.
MARKETS AND FED POLICY IMPLICATIONS:
The economic data and the stock markets are diverging, demonstrating once again that we shouldn’t confuse Wall Street with the economy.
The U.S. remains the rock upon which world growth can build on and the exchange rate race to the bottom that is being led by the Chinese shows how everyone else recognizes that reality.
But tomorrow is another day and another jobs report, so the best thing for investors to do is show some patience.
Maybe, just maybe, the employment data will provide the clarity that the Fed members seem unable to communicate.
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