Goldilocks Jobs Report Sends Stocks Higher

Another Bad ISM Report

September ISM services report was like the manufacturing PMI. It fell and both reports were paired with an improving, but still weak Markit PMI. A key differences between the services and manufacturing PMIs from ISM are that the services PMI was above 50 and that the services report showed much more weakness in production and new orders. 

For that 2nd reason, I’d say this report was worse than the manufacturing one. Which is a surprise because the bulls have been saying economic weakness is centered in manufacturing.

If both the Markit and ISM services PMIs, are correct, weakness is widespread in the economy. It’s not just in manufacturing. One way to compare the two ISM PMIs besides just looking at the headline readings is reviewing their GDP growth equivalencies. 

Manufacturing PMI was consistent with 1.5% GDP growth and the non-manufacturing PMI was consistent with 1.4% growth. Breakeven line where the PMI is consistent with a recession is higher for the service sector as any PMI below 48.6 is recessionary.

Specifics Of The Weakness

Specifically, the ISM service sector PMI fell from 56.4 to 52.6 which missed estimates for 55.5 and the low end of the estimate range which was 54. The index was far below the 1 year average of 56.8. As you can see from the chart below, the PMI is down 5.6% year over year which is almost half the recession average of -11.2%. 

This was the lowest PMI since August 2016 (51.8). Business activity/production index cratered. It fell from 61.5 to 55.2. Good news is 13 industries showed improvement and only 2 showed declines. Declines were in educational services and other services.

New orders also cratered as the index fell 6.6 points to 53.7. This was the largest decline out of all the sub-categories. 3% fewer firms stated they had higher new orders and 4% more firms stated they had lower new orders. 12 industries were on the positive side and 4 industries reported contraction. They were real estate, rental & leasing, other services, and wholesale trade. Given the improvement in the residential real estate market, it’s surprising to see real estate and rental & leasing contracting.

Surprisingly, the new export orders index was up 1.5 to 52. You would think the trade war would be hurting exports. On the other hand, services don’t rely on trade as much as manufacturing, so there might not be much to take away from this. As you can see from the chart below, the services employment reading fell from 53.1 to 50.4 which was the worst reading since February 2014. That decline in February 2014 was odd because the economy was strong in 2014. It looks like a blip lower. This downturn is more sustainable since the economy is seeing cyclical weakness.

In the employment category, firms stated, “Number of new employees starting to level off” and “Tightening workforce is leading to a more competitive market for qualified potential employees.” 11 industries saw improved employment and 4 saw contraction. 

Four that were in contraction were education, finance & insurance, professional, scientific, & technical services, and wholesale trade. Since we now have the benefit of hindsight, the BLS report was ok, but definitely signaled the same weakness shown in the PMIs. Markit projection for less than 100,000 jobs created was too negative again.

Job Growth Not As Bad As Many Feared

Private sector job growth missed estimates decently and the government was a big job creator. Government hiring wasn’t due to the census like expected. This report wasn’t as bad as I feared. The stock market reacted kindly to it. It was taken as a Goldilocks report as it wasn’t too hot, but it wasn’t too cold. Hourly wage growth fell, but there was still positive job creation. It was weak enough to trigger rate cuts, but not recessionary.

Specifically, there were 136,000 jobs created which slightly missed estimates for 145,000. The good news is August’s reading was revised higher from 130,000 to 168,000 and July’s reading was revised up 7,000 to 166,000. On the negative side, private sector payrolls growth was only 114,000 which missed estimates for 135,000. The government was expected to add 10,000 jobs, but as the chart below shows, it added 22,000 jobs. 

This wasn’t because of the census as state and local government added 24,000 jobs. As the chart also shows, manufacturing lost 2,000 jobs which missed estimates for a 3,000 gain and August’s 2,000 gain. It isn’t as bad as it could have been given the weakness in the manufacturing PMIs.

Almost exactly in tune with the ADP report, education and health services added 40,000 jobs. Even though job creation was near population growth, the unemployment rate fell from 3.7% to 3.5% because the pool of available workers fell 545,000 to 10.6 million which is an 8 year low. 

Unemployment rate hit a new cycle low; it was the lowest since December 1969. Similarly, the underemployment rate hit a cycle low as it fell from 7.2% to 6.9%. That’s the lowest reading since December 2000. Lowest reading since 1994, which is as far as the data goes back, is 6.8%. Next month, this reading could reach a record low.

Steady Labor Force Participation Rate

Labor force participation rate stayed at 63.2% which beat estimates for 63.1%. Population increased 206,000, the labor force increased 117,000, and the number of employed people increased 391,000. I was surprised to see the prime age labor force participation rate flat at 82.6%. Because it increased 0.6% in August, I expected it to fall back this month. This reading signals the labor force is very close to full.


ISM non-manufacturing PMI was very disappointing especially in terms of production and new orders. The BLS labor report missed estimates modestly, but had positive revisions. The market took this miss as a Goldilocks report. It wasn’t as weak as some feared. 

It showed wage growth fell which means the economy isn’t overheating. This decline in wage growth supports the decline in treasury yields. I will further detail the September labor report in a future article.

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