The United States is in a transition of power period. As such, few important decisions are possible in the days left to the inauguration of the new President and his cabinet.
Yet, the economy marches on and America continues to outperform, considering the crisis. Yesterday’s ISM Manufacturing data at 57.5 confirms a strong comeback in the manufacturing sector, albeit the services sector weighs more in the GDP.
Strong ISM Manufacturing in November but Weak Employment Numbers
The ISM in the United States is similar to the PMIs in Europe and the rest of the world. The only difference comes from the institutions that do the calculations – Institute of Supply Management (ISM) in the first case, and Markit, in the second.
When a sector expands when compared to a previous period, the actual number of reports prints above 50. When it shows a contraction, the number comes out below 50.
The bigger the distance from the 50 level, the more severe the recession, stronger the expansion, are. However, levels above 60 or below 40 are extreme. They show an economy overheating or in deep recession. As such, the implications go beyond the report, as the effects on inflation and on monetary policy weigh.
Yesterday’s manufacturing report at 57.5 came more or less in line with expectations of 57.9. It shows a strong performance in the sector, with plenty of good news if we look at the details.
For example, most of the sub-categories are growing – e.g. backlog of orders, new export orders, production. However, there is one sub-category that still contracts – quite an important one, considering that this is the NFP week. The employment component fell to 48.4 from 53.2 in October.
In a way, it is not surprising. Last month the Initial Jobless Claims reports, released on each Thursday, showed a jobs market that struggles.
Jerome Powell’s testimony yesterday made it clear that the United States is not out of the words. Moreover, he emphasized the need for more stimulus as people do struggle finding new jobs as the job creation process takes time.
All in all, November manufacturing data showed a sector expanding, which is good. The only worry comes from the employment component and the fact that this report is a diffusion index. In other words, it bounces or collapses easily because it compares the outcome with the previous month’s release. As such, one needs to have solid growth trends and stable releases above 50, to claim that the sector is healthy.
More importantly, the employment component must grow. So far, it does not.