ISM Reading Falls, Trade Slips, Payrolls and Earnings Offer Positive Outlook
At the end of last week we got readings from ISM, trade, payrolls, and earnings for workers. The news was mixed and therefore if you are positive, negative, or indifferent on the economy, there is something for you to hang your hat on.
ISM Manufacturing Falls
We begin by looking at the ISM manufacturing and services readings. For ISM manufacturing, the reading fell to 46, making this the eighth month in a row that the reading has been in contraction. However, the ISM services reading rose to 53.9, again indicating expansion. This divergence is also seen in recent inflation numbers as the inflation rate for the services of the economy are running above the Fed’s target rate of 2%, while the production-related inflation readings are well below the 2% target, but with the services sector of the economy being such a large portion of economic growth we see both economic growth and inflation running stronger than expected.
Total Trade Drags Economic Growth
Trade was definitely more negative. While the trade deficit declined, it did so because imports declined faster than exports.
However, it is total trade that is the real issue for economic growth. In the last year, imports have declined almost 5% and exports are down about 5.2% — a drag on economic growth.
Job Creation Numbers are Positive, but Below Trend
For the month, the US added 209,000 jobs with the unemployment rate ticking down to 3.6%, which is quite low. The jobs created are also below last month’s reading and below the 12-month average. So, one could take a positive view because the numbers are still positive and the unemployment rate declined, or a negative view focusing on the below-trend job creation.
Average Hourly Earnings and Weekly Hours Are Up
However, what was certainly positive was that average hourly earnings were up for both the month and the year, as well as an increase in Average Weekly Hours, which should translate in growth-in-earnings and over a wider base of the population.
Big Picture Glance: Past Recessions
Our final chart shows the Federal Reserve rate over a longer period with the grey zones being past recessions.
Mixed Economic Data Will Likely Continue
In summary, the negative news was ISM manufacturing, trade, and rates. The positive news was ISM services, average hourly earnings, and average hours worked. The payrolls numbers and unemployment were mixed depending on your point of view. Since the Fed has stated that it believes inflation can only be tamed with a decline in job creation, we still believe they will make good on their expectation of at least two more rate hikes. However, many parts of the economy are showing resilience and mixed economic data will very likely be the norm for some time.
For the week of July 10th, the biggest economic news will be readings on inflation in the form of the Consumer Price Index (CPI) and the Producer Price Index (PPI).
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