Looking for signs
The ISM Manufacturing Index came in at 59.5 in July, down from 60.6 the month before. Any reading above 50 indicates an expansionary environment, but this is the lowest reading we’ve seen in the index since January. The prices index came in at 85.7, down 6.4 points from June’s reading, which was the highest since July 1979. Additionally, the employment index climbed up 3 points from last month to 52.9. Meanwhile, the ISM Services Index came in at an all-time high reading of 64.1 for July. While this index also indicated improving employment, it did indicate prices continuing to increase.
Moral of the story: Both lower prices and higher employment are good indications in the manufacturing index, indicating potentially lower pricing pressures (lower inflation) and better employment across the manufacturing sector. However, employers across the board are still reporting meaningful supply chain disruptions and difficulties finding labor. Though some materials prices are coming down for manufacturers, as long as labor continues to be challenged, consumers will continue to feel the pain of rising prices.
Recovery continues
The US created 943k jobs in July, surpassing expectations for 845k new jobs, which is the highest gain we’ve seen in almost a year. This also brought down the unemployment rate to 5.4%, 0.3% lower than expectations, and significantly improved from the pandemic high of 14.8%. Unsurprisingly, job gains were most prominent across leisure and hospitality as hot vax summer continues. The unemployment rate in this industry has fallen to 9%, compared to 25% a year ago. Job gains were also notable in the education and business services sectors. While we’re worrying about inflationary cost pressures for consumers, hourly earnings also increased 4% in July compared to the same time last year. The cherry on top came in the form of upward revisions totaling 119k for the last two months’ reported job gains.
Moral of the story: This is another Goldilocks jobs report – it’s hot enough to indicate a strong recovery but not so hot that it means things are getting out of control. The unemployment number is especially encouraging in the context of the labor force participation rate increasing to the highest level since the pandemic started. According to data from Indeed, there are 9.8m job openings and only 8.7m unemployed people, so hopefully we continue to see strength in the recovery of the labor market. The biggest wild card here is the rapid spread of the delta variant; hopefully it doesn’t derail the progress we’re making on getting back to that 3.5% unemployment rate we were sitting at pre-COVID.
Earnings season so far
About 80% of the S&P 500 companies have reported earnings so far and 87% of them have reported earnings, on average, about 17% ahead of expectations. The average earnings growth rate so far is nearly 89%, which is the highest year-over-year growth since the fourth quarter of 2009. To be fair, the extent of growth is partially driven by really low earnings in the second quarter last year, which reflected the worst of the pandemic shut-downs, but it is also a reflection of the strong recovery we’re seeing across the board. All sectors in the S&P 500 are reporting earnings growth, though energy, industrials, financials, consumer discretionary, and materials sectors are leading the way.
Moral of the story: The growth across industries is expected to continue (though not at such an elevated rate) as analysts are still anticipating double digit growth in the second half of the year. Let’s hope this delta variant doesn’t completely derail this recovery.