ISM Manufacturing Up, but ADP Private-Sector Jobs Down

Volatility of economic data adds up to 'flat,' but market surges

Market watchers may be feeling queasy about the economic data rolling in as summer winds down, but the overall effect of all the ups and down is ... flat.

On Wednesday, September 1, the latest report on manufacturing showed strength, but another report on company hiring showed weakness. While the Institute for Supply Management (ISM) announced that U.S. manufacturing rose in August for the 13th consecutive month, the ADP National Employment Report posted an unnerving drop in private-sector employment.

Steve Blitz, senior economist with New York-based Majestic Research, said that taken together, the ISM and ADP numbers reflect a flat economy.

"Call it 2% growth," Blitz said in an e-mail message. "This is like following a .500 baseball team. Over any 10-game period the team can look like world beaters or cellar dwellers, but in the end it evens out to an equal number of wins and losses. The economy at 2% growth, which is effectively zero growth in terms of its impact on reducing excess supply of capacity in capital and labor, is like that .500 baseball team - at least for the time being."

The ISM'S purchasing managers index (PMI) came in at 56.3 points, up 0.8% from July's 55.5. A Thomson Reuters poll of economists predicted the index would show a reading of 53. New orders slowed, however, posting a 0.4% decrease, to 53.1 from 53.5, following a 14-month trend of slower growth. Manufacturing employment was up 1.8%, to a 60.4 index reading in August versus 58.6 in July, for the ninth month in a row of growth.

High Unemployment a Sticking Point

Although manufacturing is holding up, high unemployment continues to be a sticking point in the U.S. economic recovery. Prior to this Friday's August jobs report from the U.S. Labor Department's Bureau of Labor Statistics (BLS), which is anticipated to show 100,000 lost jobs for the month, market observers are watching employment-related news closely.

According to the ADP National Employment Report also released Wednesday, private-sector employment decreased by 10,000 from July to August on a seasonally adjusted basis. The estimated change of employment from June to July was revised downward, from the previously reported increase of 42,000 to an increase of 37,000.

"Unlike the estimate of total establishment employment to be released on Friday by the BLS, today's figure does not include the effects of federal hiring -- and now firing -- for the 2010 Census," the ADP report's authors asserted in their release. "Hiring for the census peaked in May. For this reason, Friday's figure for the change in nonfarm total employment reported by the BLS might be weaker than today's estimate for nonfarm private employment in the ADP National Employment Report."

No Change Expected in Friday's Jobs Report

Looking at the ADP report, Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd., in Valhalla, New York, said in an analyst note that the 10,000 drop in August was below the consensus 15,000 and the first decline since January.

"The difference from the consensus is statistically insignificant but the underlying story, of a clearly softening labor market, is not," Shepherdson said. "Allowing for

the recent run of undershoots, our model of the official private payroll number, which incorporates ADP, is consistent with a roughly unchanged print on Friday. Demand growth has slowed, largely triggered by the spring plunge in stock prices, and cautious companies are responding by holding fire on hiring. We do not expect a spiral down into sustained serious net job losses, but a real revival in payrolls is clearly still some way."

Challenger Layoff Plans Surprise With Good News

Surprisingly, company layoffs may have provided the most encouraging employment news for August.

U.S. companies announced 34,768 planned job cuts in August--a 10-year low, according to outplacement consultancy Challenger, Gray & Christmas. The cuts were 17% lower than the 41,676 cuts announced in July, marking the first decline after three months of increases. August 2009 job cuts totaled 76,456, 55% higher than this August. The 374,121 job cuts through August are down 65% from the 1,070,504 layoffs announced by this point in 2009.

"Every other job-market indicator seems to be stuck in first gear," said John Challenger, chief executive officer of Chicago-based Challenger, Gray & Christmas. "In contrast, the layoff picture has improved so significantly that we are at pre-dot.com collapse levels when it comes to monthly job-cut announcements. There have been 15 consecutive months in which job cuts have not exceeded 100,000. Job cuts have not exceeded 50,000 since March."

Stock Market's Early Climb Holds Seady

After bouncing higher in the morning on encouraging news out of China and Australia, U.S. markets on Wednesday held firmly in positive territory. The Dow Jones industrial average rose 2.54% to close at 10,269 points.

The state-affiliated China Federation of Logistics and Purchasing said manufacturing growth was up for the first time in four months in August. The federation's purchasing managers index rose to 51.7 points from 51.2 in July. A number above 50 signals expansion.

Australia, meanwhile, rose a seasonally adjusted 1.2% in the April to June quarter--its highest growth in three years--on Asian demand for commodities such as iron ore.

Looking at the overall U.S. economic picture, Bank of America Merrill Lynch Global Research's economics research team published their outlook for a "growth recession" on Wednesday.

"We now expect a growth recession: we think the economy will manage to post positive headline GDP numbers, but this growth will not be fast enough to keep the unemployment rate from drifting higher," the BofA Merrill economists wrote. "We expect below-trend GDP growth in each of the next four quarters, and with a gradual rise in the unemployment rate above 10%. With the weaker growth, we believe the Federal Reserve will launch QE2--a new asset buying program--in Q1 of next year."

Read about the BLS' July jobs report from the archives of InvestmentAdvisor.com.

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