INDICATOR: May NonManufacturing Activity, Employment Trends and Revised First Quarter Productivity

KEY DATA: ISM (NonManufacturing): -0.6 point; Orders: -5.5 points; Hiring: +6.4 points/ Employment Trends: +0.7%; Productivity: 0% (up from -0.6%)

IN A NUTSHELL: “The economy is neither accelerating nor slowing, but the labor market is looking up.”

WHAT IT MEANS: The Fed is meeting next week and since the members continue to say they are data driven, we need to look closely at the last set of numbers that will be released before the decision is released on June 14^th. One of the more important private sector numbers is the Institute for Supply Management’s (ISM) reports on manufacturing and nonmanufacturing. Last week, ISM found that manufacturing production moderated in May. Today the supply managers indicated that the remainder of the economy, which is most of the economy, also slowed. The details of the report, however, seemed to point to continue decent growth in this sector. Orders grew much more slowly, but they had surged in April, so the level is still quite solid. Indeed, they were up enough to cause backlogs to expand and firms to hire a lot more workers.

While the May jobs report was less than many expected, realistically, it was what should have been expected. The huge ADP payroll gain forecast created a bullish view of the number that dominated the discussion. But as noted on Friday, the report still points to a solid labor market and today’s numbers reinforce that view. Not only did the ISM hiring index jump in May but so did the Conference Board’s Employment Trends Index. The Chief Economist said it best: “Employment will likely grow fast enough to continue tightening the labor market.”

If the economy is to accelerate to the 3% or more growth that the administration projects, productivity will have to surge. While the government revised upward the first quarter number, on a year-over-year basis, the 1.2% rise is half as fast as it needs to be to reach the growth target.

MARKETS AND FED POLICY IMPLICATIONS: With the employment report behind us, the next two big ones before the FOMC announcement are retail sales and consumer prices. They will be released the morning of the 14^th and it is not likely they will be so disturbing that the Fed will not raise rates. For those at the Fed who may have been concerned about the jobs report, today’s data should calm the weak kneed. The labor market is just fine. In addition, the economy is growing at a pace enough to create more jobs and reduce the unemployment rate further. The only “worry” is the decline in energy costs, which is pushing inflation further away from the target. Thankfully, we haven’t seen cut backs in the energy patch and it was that sector’s downturn that slowed growth significantly. But the real question is when will the next rate hike occur? Consumers are becoming debt burdened but wage gains remained stubbornly low. Uncertainty about government policy is hardly helping businesses make expansionary long-term plans and that too is likely slowing things. And finally, the magic of sequestration is keeping government spending in line and the next budget is a huge question mark, so it is hard to see where fiscal policy will help out. Put that together and 2017 looks like it will come in at trend, maybe 2¼%, enough to support at least one more increase after next week’s likely hike. Rate hikes don’t seem to worry investors. Actually nothing seems to worry investors and today’s data should not do anything to cause concern to suddenly appear.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.