Monday Update: Strong Jobs, Weak Manufacturing

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 11, 2016 1:40:35 PM

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monday updateLast week was a big one for economic data, with important releases on business and jobs, plus insights into the Fed's outlook.  

The numbers from last week

The ISM Manufacturing Index, which covers manufacturing and industrial businesses, declined slightly to 48.2 from the previous 48.6 (the sixth straight decline) and remains in contractionary territory for the second month in a row. The continued weakness is due to the strong dollar and lackluster demand outside the U.S.

Although the ISM Manufacturing Index is important, it covers only one-eighth of the economy. The remaining seven-eighths is the service sector, represented by the ISM Non-Manufacturing Index, which declined to 55.3 from the previous month’s 55.9. Despite the drop, this is still a reasonably strong number; consistent with past expansions, this level has historically indicated growth of around 3 percent. The continued strength of this index suggests that the domestically focused economy continues to be insulated from troubles elsewhere in the world.

The Fed also remains confident in the U.S. economy. The minutes from the December meeting of the Federal Open Market Committee were clear that, in the Fed’s opinion, the labor market is at or close to stabilization, and the rest of the economy is also quite solid. Given the unanimous decision to raise rates, this wasn’t really a surprise, but the consensus on the base economy was more coherent than most expected. Of the concerns that remain, the primary one seems to be low inflation, but even there, the majority expects further increases as the economy continues to improve.

Finally, the December employment report was extremely positive.

  • Total jobs added surprised substantially to the upside (292,000 compared with expectations of 200,000).
  • The prior months were revised upward as well, by 50,000 jobs.
  • The unemployment rate remained the same, at 5 percent, and the underemployment rate was also unchanged at 9.9 percent, but these are actually positive results, as they were driven by people moving back into the labor market.

The only disappointing component was wage growth, which was flat for the month. But again, this may well be due to less-skilled workers being drawn back into the labor force. Overall, it was a very strong report, indicating that the U.S. economy continues to expand despite substantial headwinds from abroad.

A look at the week ahead

This week’s data calendar will be relatively light and focused on the consumer.

Retail sales are expected to increase slightly, by 0.1 percent overall or by 0.4 percent excluding cars, but there are substantial risks to the downside. With a sharp drop in auto sales and declines in gas prices, retail sales may suffer more than expected, despite strong growth in employment and wage income.

Next, we’ll see results from the University of Michigan Consumer Confidence survey. Expectations are for a small increase, but the recent drops in stock prices make that another downside risk. Even if there is a small decline, however, confidence is expected to remain in a healthy range.

Finally, industrial production figures will be released. Expectations are for another drop, once again due to decreased energy drilling and lower utilities output as a result of the warm weather. For manufacturing specifically, a much smaller drop is expected, which could indicate that the sector is stabilizing. That would be good news, but actual improvement still isn't on the horizon.

“We can be heroes, just for one day”

On a final note, I want to take a minute to say goodbye to David Bowie. The world has lost a great artist and a great showman. “Look out you rock ’n’ rollers, pretty soon now you’re gonna get older.” He was right, and all too soon. RIP.

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