July Unemployment Rate: Manufacturing Means Nothing Without Job Growth
U.S. manufacturing activity rebounded in June, as the Institute for Supply Management Index reported a rise to 50.9 from 49.0 in May. Any number above 50 signals that business is growing so the rise was warmly welcomed by the markets, particularly as it was slightly stronger than the consensus of analysts’ estimates priced in. The stock market liked the number, and the S&P500 gained 0.54% on Monday.
It’s never a great idea to give too much weight to month-on-month data points, subject as they are to near-term skews, revisions, and in the case of the ISM index, sentimental bias. The number looks healthy but there are some fairly large warning signs out there too. The same survey showed the employment reading at its lowest since September 2009 and last week the Bureau of Economic Analysis revised GDP growth figures for the first quarter from 2.4% to 1.8%, tellingly below the government’s current 10-year borrowing rate. Consumer spending and imports growth were also over-egged. Personal consumer expenditure was revised from 3.4% to 2.6% and imports contracted by 0.4%, having first been reported as having grown by 5.4%. Basically, the high-fives at the Treasury in June were a little premature.
Employment is still the key metric for the U.S., both for short-term market movements and for long-term sustainable economic growth. From a long-term perspective spare capacity in the labor market is a drag on growth. While unemployment rates have been improving since the crash, much of that improvement has been in short-term unemployment and there is still some way to go to get from 7.6% to the long term average of 5.82%. Making those people productive and more able to consume will not only boost economic growth but reduce the numerator of the public debt/deficit problem by bringing down benefits payments.
Short-term market movements are also increasingly focused on unemployment because the Federal Reserve has been quite explicit in suggesting the tapering of Quantitative Easing will be linked to the health of the labor market. The central bank currently purchases about $85 billion of government bonds every month providing a huge amount of liquidity to the capital markets, much of which has found its way to the stock market in anticipation of asset price inflation. Accordingly, the stock market rally since 2008 has suffered very few bumps in the road but even vague indications of tapering QE sent equity markets aggressively lower in June (the S&P 500 lost 3.8% in two days).
So what does the June ISM number mean for the U.S. economy? In the short term, not as much as the job-market data, and in the long term, not as much as the job market data. All eyes will be on the non-farm payroll numbers published on Friday. Odd as it seems it may be that, while Obama and Bernanke cross their fingers for a decent number, investors cross their fingers for a bad one so the QE tap stays open a little longer.