The Independent Market Observer

Monday Update: Signs of Spring

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 7, 2016 1:08:28 PM

and tagged In the News

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MarketOutlook_1.jpgLast week’s economic news was very good, with all major releases beating expectations.

Business sentiment in the service sector remained positive, declining less than expected, and the manufacturing sector moved closer to stabilization. This confidence was ratified with a much-stronger-than-expected increase in jobs, suggesting that the economic slowdown of late last year was at least subsiding (and might be reversing).

A closer look at last week’s stats

The Institute for Supply Management, which surveys businesses about their plans and expectations for the future, released its results for February last week.

The ISM Manufacturing Index substantially beat expectations, rising from 48.2 to 49.5, above the expected 48.5. Although the index remains below 50 (which indicates contraction), this is the second gain in a row. By moving closer to breakeven, this result suggests that the manufacturing sector is stabilizing rather than continuing to deteriorate. The more forward-looking components, orders and production, remained in positive territory, further supporting this conclusion.

The ISM Non-Manufacturing Index also beat expectations, although more modestly. As expected, it ticked down slightly but only by a tenth of a point, from 53.5 to 53.4. This index remains in expansion territory, and the moderation of the decline from past months suggests that it, too, may be stabilizing. As with the manufacturing index, positive results in the more forward-looking components support that idea. Both levels and trends are better than those of past months, indicating stabilization and continued growth.

The most important release of last week was the employment report. Notably:

  • Job growth hit a surprising 242,000, well in excess of the 195,000 expected, and previous months were revised upward by 30,000. The household survey results were even better.
  • The underemployment rate dropped to 9.7 percent from 9.9 percent, suggesting that people on the edge of the labor force are now able to find jobs.
  • The unemployment rate remained stable.

The weak component of the report, wage growth, dropped by 0.1 percent, below expectations. Though worrying, this is a not-unreasonable result of less-desirable workers rejoining the labor force, as seen in the decline in the underemployment rate. There's also a good chance that wage growth was affected by a quirk in the calendar, making it something to watch rather than something to fret over just yet.

The week ahead

No headline economic news is slated for release this week. Other items to watch include the NFIB Index of Small Business Optimism and the weekly jobless claims number. No doubt there will be other newsworthy stats as well.

Have a great week!

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