It’s Going Down

Timber! 

It finally happened guys, the ISM manufacturing index fell below 50, indicating a contractionary environment. Economists were expecting the index to remain in slightly expansionary territory, but the 49.1 reading in August is the lowest since January 2016. We saw a marked decline in both new orders and production this month as only half the industries reported any growth in August and only 17% of industries reported growth in new orders. 

Moral of the story: This index has been dangerously approaching contractionary territory for months and this report is indicative of a notable decrease in business confidence during the month of August. This index has fallen 10 points since the trade war began last year but further trade talks are expected in DC in October. A resolution on this front would be the greatest early holiday gift but I’ve learned to keep my expectations as low as they are for my NY Giants pulling off a championship season in the near future.

The Big Report

The August jobs report was fairly disappointing as we created only 130k new jobs compared to the 150k expectations. And 25k of those new jobs were temporary workers hired by the government to prepare for the 2020 Census. And the jobs numbers for June and July were revised lower. This brings the 2019 monthly job growth to 158k compared to the 223k monthly rate last year. The silver lining in this report was wage growth coming in better than expected at 3.2% and labor force participation increasing to its highest level since August 2013. 

Moral of the story: The consumer is running the economy. As business sentiment slows, hiring slows. This is fairly obvious in the ISM manufacturing and jobs reports we saw this week. The latest consumer spending reading showed consumers had to dip into their savings to maintain spending. Once the labor market is impacted enough that consumers curb spending….SOS.

Doing it better 

Labor productivity increased at an annual rate of 2.3% during the second quarter, down from the 3.5% growth rate we saw in the prior quarter driven by the biggest decline in manufacturing productivity in almost two years. Breaking apart the pieces of productivity, outputs increased 1.9% while the hours worked decreased 0.4%. 

Moral of the story: The near-historic low level of unemployment hasn’t been producing the wage growth expected and productivity, which drives a higher standard of living, has generally been the driver. However, productivity is fairly cyclical as it rises with economic growth and falls with recessions. We’re seeing annual growth in productivity today at the highest levels since early 2015 but with a potential economic slowdown approaching, it’s not a surprise that we saw a decline compared to last quarter.