“Unemployment rate is low in our county, making it hard to find workers. We are understaffed and running lots of overtime.” That’s a survey response from a person in the Plastics & Rubber Products industry in the ISM Report on Business (ROB) that we got this past Friday. That quote pretty much sums up the renewed strength in manufacturing and the tightening of the labor market that we are seeing today. Normally after a payroll Friday, I feel compelled to write about the job gains we are seeing and what impact they have on the overall economy. However, I think it’s the manufacturing data that deserves the spotlight this time. It’s the recent rebound in manufacturing activity that could be the catalyst that drives this economy to a whole new level of performance in 2016. So let’s take a look at the data we got this week and its implications going forward.
As I touched on in last week’s writing, regional Fed manufacturing surveys had all been showing significant gains. We got an extension of that this week, with a better than expected report from the beaten down Dallas Fed which showed solid gains in its production and new orders components. Aside from the Dallas Fed report, we also got encouraging reports from the Milwaukee ISM Manufacturing report and the Chicago PMI. The Milwaukee index went from 55.22 to 57.78 with the production component going from 52.59 all the way to 68.81. The Milwaukee ISM is somewhat of a C-list indicator based on its area of coverage, but it still verifies what we are seeing in the larger and better known regional surveys. For example, the Chicago PMI that we got on Thursday jumped well back into expansionary territory to 53.6 from 47.6. The gain was primarily driven by increases in the employment and new orders components. All these regional reports from the last couple of weeks were like a crescendo to the ISM Report on Business on Friday. Fortunately, this time the music ended with a smooth finish instead of being off-key as the report came in ahead of expectations and back into expansionary territory at 51.8 from 49.5.
The ROB is essentially the most comprehensive and oldest report on manufacturing data available. The report began in 1931 and is based on the following industries which are weighted by their input to GDP: Food, Beverage & Tobacco Products; Textile Mills; Apparel, Leather & Allied Products; Wood Products; Paper Products; Printing & Related Support Activities; Petroleum & Coal Products; Chemical Products; Plastics & Rubber Products; Nonmetallic Mineral Products; Primary Metals; Fabricated Metal Products; Machinery; Computer & Electronic Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Furniture & Related Products; and Miscellaneous Manufacturing (products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies). As you can see, the list is quite exhaustive.
When we take a look at the internal components of the report, there isn’t much not to like. Aside from the employment segment still being in contraction, the rest is good. Specifically, new orders went from 51.5 to 58.3 while production climbed from 52.8 to 55.3. I encourage the reader to go through the full report because the comments from the survey respondents paint a fairly bullish picture, especially when you consider how poorly performing manufacturing has been. That said, if manufacturing continues to get help from a softer dollar, we could really add some extra zip to this economy.
Now without further ado, we go to everyone’s favorite labor data point, the nonfarm payrolls report. Friday gave us another month of 200,000 plus job growth with the added bonus of strong average hourly wage gains. March saw 215,000 new jobs created along with a .3% month over month gain in average hourly earnings. For me, the best part of this report was the 33,000 jobs created in Professional and business services (PBS). Within PBS, we saw gains in computer systems design, management and technical consulting services and administrative and support services. While some people will discount the gains in administrative and support jobs as being low pay and inferior, this is a critical mistake. Support jobs grow because the underlying business has grown. In some cases there are regulatory needs for more support people, but that’s fairly centralized in financial services. That said, businesses don’t hire non-revenue generating positions unless growth in the business warrants it.
Now within PBS, it’s important to look at the growth in one of its sub-sectors, Professional and technical services (PTS). PTS is comprised of lawyers, accountants, computer programmers, other IT services, biotechnology research, and advertisers to name a few occupations. With the exception of advertisers, those are all occupations that have fairly non-cyclically dependent demand, i.e. sustainable. Since 1991, PTS has had an average year over year growth rate of 2.6% with the most recent reading at 3.4%.
As you can see above, since 1991, PTS has had a higher growth rate than food services. So please don’t be fooled when the financial media bears say that all the job growth has been in baristas and the like. The opposite is true. Our labor force is showing higher growth in the more skilled and significantly higher paid areas. As time goes on, the labor force is literally generating greater earnings while simultaneously becoming more sustainable.
The growth in Food services and drinking places (FSD) employment is another area where economic bears go awry. I’m happy to see growth in FSD as it shows that people feel comfortable enough with their disposable incomes to go out and spend money dining out. Not to mention, it also shows an overall positive feeling in consumers as well. Families and friends going out to eat more often is a good thing. A great example of this is Darden Restaurants who already raised their earnings guidance back on March 9. DRI will report Q3 earnings on Tuesday and a strong number there will verify consumer confidence.
Now we head into another week where we have a smattering of data points covering manufacturing, services, and labor markets. I think the most important item will be the Non-Manufacturing ISM (NMI) report on Tuesday. Like its manufacturing counterpart, the ROB, the NMI is our best services industry metric. I would expect to see the NMI to have picked up in March. Given the services job gains we had in March, that should drive the employment component of the NMI back into expansionary territory. Assuming a reading of 51 for employment and with the other components staying flat, we would get an NMI of 53.7, up just 3/10ths from February. However, we should be able to do better than that- I hope. Then, we also get another JOLT report next week. Given some of the comments made recently from employers, it seems we are having a skills mismatch in our labor force which is allowing positions to remain unfilled. A discussion on this topic goes beyond the scope of this writing, so I’ll just leave it with America needing to bring back trade schools with a focus on technology. On that note, let’s hope oil can hold its head up this week until earnings start to roll out and have a chance to drive up market multiples with a stronger E in P/E.