A lot to discuss this week so I will dive right in.
The July ISM Manufacturing report was released last Monday. The report was essentially flat from the June performance number. At 52.8 for July this is just barely above the level of growth and contraction. 50 is the cutoff. Within the report there are concerns for the future. New orders are contracting from prior months. Production is growing but at a slower pace. Supply chain issues continue to be the focal concern to meet an even lower demand. For the third month manufacturing employment declined. The one possible bright spot in the report are the prices of core goods. While the prices continue to increase, that slope of the increase is flattening. In June the price index was 78.5, in July it was only 60. Again, 50 is the cut off. Hopefully this trend will continue.
Comments within the report include a growing list of commodities that are down in price. Aluminum, copper, diesel fuel, lumber, natural gas, plastics, and steel were all down from the prior month. It was not long ago there weren’t any commodities that were declining in price. This is likely to continue in some commodity areas, others will continue to rise at higher levels until the supply issues are resolved.
Respondents continue to point out the supply chain issues that are related to chips, concerns with China as well as labor all being constraining factors. Across the board comments indicate that later this year we can expect a significant slowing in manufacturing. New orders and cancelation of some future orders are already creating a rather dismal period coming up.
Remember that manufacturing accounts for 12% of the overall US Economy. The service sector is much larger, accounting for nearly 80% of the economy. The Service ISM Report came in very strong. Services grew in July, improving from 55.3 to 56.7 during the month of July. That increase provides a much more potent boost than anything from manufacturing. Embedded in the report is some mixed news. Activity and future orders continue to increase, growing faster than prior months as consumers switch from projects to service. While many of the comments in the report indicated that prices seem to be the primary deterrent to greater strength, there are other concerns about the future. While things are going well right now, finding people is leaving a more somber opinion of the future. One key issue that continues to cause headaches is the employment area. While the July number showed a slight contraction, the firms included in the report share that employee turnover and back fills are harder to come by. New hires are hard to find that are qualified. Eight industries in the survey increased employment, including mining, construction, hotel and food services along with wholesale and trade. Seven areas declined in hiring including Agriculture, finance, education and transportation. It is unknown as to whether the declines are induced due to overcapacity or the inability to find acceptable hires. From the comments in the report, it seems that if companies could find help, hiring would be stronger.
The Friday jobs report was over the top, exceeding even the wildest expectations. In July, there were 528,000 new hires producing an unemployment rate of only 3.5% shocking everyone. We are now at a total of 22 million employed, which is above the pre pandemic level. The largest area of hiring for July was in leisure and hospitality with 96,000 new jobs. Food service and drinking added 74,000. Professional and business services increased by 89,000 in July which likely reflects a pretty strong market for the recent college graduates. Architectural and engineering services added 13,000. This indicates a likely an anticipation in new construction coming later this fall. Health care hiring posted a nice increase of 70,000 with many job openings still available. Government hiring was also strong with 57,000 added to the roles there. In spite of what the ISM report indicated, manufacturing added 30,000.
The level of new hires in the service sector could explain the GDP issues of the first half of this year. It is likely that business in the service areas were curtailed due to lack of help. This could provide the explanation of why we are in a recession while still having a strong job market.
Based on the ISM reports as well as the jobs report for July, it is hard right now to believe that a recession will be anything other than a soft landing. While inflation is still raging and creating hardships, the level of job creation reflects the ability of the consumer to continue to spend.
The evidence of a longer period of stagflation is building. The supply chain issues are creating inflation. The low GDP growth matched with high job creation numbers reflect a troubling decline in productivity which will continue to produce inflation. Interest rates that continue to hover at historical lows are doing little at this time to curtail much in the way of spending, if you can find what you want to purchase. Liquidity levels in the economy also remain at historic highs, too much cash chasing too few goods. All of this points to a rather long term of inflation. This truly is the hangover that the pandemic and world government policies created.
Have a great week.
