LAST WEEK IN THE MARKETS AND THE ECONOMY
To all clients:
One good set of economic data, and everything turns around! Friday’s labor market report was not great. But it was better than those of recent months and, more important, better than expected. Investors (and speculators) shrugged off a slew of weak earlier reports and became more optimistic. At least for a day.
Manufacturing did not have a good July. The index complied by the Institute for Supply Management stood at 49.8, essentially unchanged from June’s reading. Remember, as this is a “diffusion” index, 50 is the breaking point: above 50 implies expansion, below 50, contraction. This is not supposed to happen a few years into “recovery.” Delving into the sub-categories of the index paints a bleaker picture. New orders are below 50, which is consistent with a reported rise in inventories and a decline in order backlogs. The employment sub-index dropped to 52.0 from 56.6 – still positive, but an unusually sharp drop over one month.
There wasn’t any better news for manufacturing from other parts of the world. A measure for the “euro zone” similar to that of the ISM in the US fell to 44 last month, a full point below that of June. The fact that export orders for German manufacturers fell the most of any euro-zone country is concerning, not only for Europe, but for what it suggests about the rest of the world which places those orders. Other export-oriented economies didn’t fare much better. In China the reading was barely above 50, after dropping for three consecutive months. The index fell two points, to 47.2, in South Korea.
Personal Income includes all payments to US households: wages, salaries, interest, dividends, even transfer payments from governments, such as the various welfare programs. This measure rose half a percent in June (the latest month made available last week). Interestingly, spending out of that income did not change at all. Combined, this means the household savings rate increased once again – not surprising during a weak economy, but a healthy development once the economy gets going again.
The ISM index for the service sector, normally less volatile than its companion manufacturing sector, showed a stronger expansion, to 52.6 from 52.1 in June.
Finally, the surprise of the week: the labor market. Nearly 175,000 additional jobs were created in July, about a hundred thousand more than the month before and, crucially, roughly 75,000 more than the consensus estimate. Not a great number given what the economy needs, and where it stands. But the upside surprise seemed to lift an air of gloom from the marketplace.
