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Improving Service Sector Is Not Translating into More Hiring

Friday, 03 August 2012 12:14 PM

INDICATOR: July Supply Managers’ Non-Manufacturing Survey

KEY DATA: ISM Non-Manufacturing: 52.6 (Up 0.5 point); Business activity: Up 5.5 points; New Orders: Up 1 point: Employment: Down 3 points

: “The service sector is improving, but that does not seem to be translating into more hiring.”

WHAT IT MEANS: The economy continues to wander along, growing modestly, but not losing steam either. The nation’s supply managers indicated that activity in the service and construction portion of the economy improved a touch during July.

New orders, including exports surprisingly, jumped. You would think that would trigger some additional hiring, but that was not the case. Instead, companies decided to cut back on their payrolls.

That is just one indication of how firms have become so cautious given the uncertainty of the so-called fiscal cliff. A second was a huge decline in imports.

With inventories building, firms are taking a wait-and-see approach, being more willing to assume slower rather than faster growth in the future.

MARKETS AND FED POLICY IMPLICATIONS: The rise in the Institute for Supply Management’s Non-Manufacturing index was more than expected, and positive surprises are always good. But this report also indicates that firms are looking into the future with real caution. That is the only way to explain the sudden cut in payrolls in the face of improving demand.

With both parties and their constituents showing intransigence on the issue of extending all or part of the Bush tax cuts, there just may be a real possibility that the unthinkable, a fall off the fiscal cliff, could actually occur.

As an economist, that prospect appalls me, but all I can do is call ‘em as I see ‘em. Regardless, coupled with the solid rise in payrolls, this report should bolster the view that the U.S. economy is not slowing down and indeed may be accelerating a touch. That would help investor confidence.

As for the Federal Reserve, the members don’t want to see the unemployment rate rise, but if the fundamental economic data are decent enough, they know that over time even that will come down. So don’t look for the Fed to do much more unless the economy really falters or the European Central Bank fails to follow through on its big talk.

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Friday, 03 August 2012 12:14 PM
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