Manufacturing PMIs Improve In October

Job Cuts Increase (YTD Total Highest Since 2015)

Job cut reports have been quite sold in recent months versus the start of the year. October reading wasn’t great, but also wasn’t as bad as earlier in the year. This report was basically more of the same. Job cuts are modestly elevated, but not worrisome. 

In October, cuts increased from 41,557 to 50,275. There have been 4 lower readings and 5 higher readings this year. Cuts were down from 75,644 last year, but that wasn’t a good report. It was an easy comp.

This report tends to be volatile, so I like to look at intermediate term trends. In that perspective, the situation ok. It’s not great like the jobless claims report. There have been 515,441 cuts year to date which is up from 441,702 last year. This total is the highest since 2015 which had the 2nd most cuts of this expansion. 

Potentially, being the 3rd highest isn’t good, but it’s also still expansionary. There were 1.1 million cuts in 2009. That gives you context as to how far away from a recession we are. This year’s peak of 77,000 isn’t even on that recessionary pace.

One of the biggest weak points is tech which has had 56,155 cuts this year. That’s way up from last year’s 9,634. HP announced it’s cutting 9,000 jobs by 2022. Retail was the weakest as it had 71,485 cuts. And it's actually below last year’s 92,735. That’s probably because the consumer has had a good year especially in Q2. Investors are expecting a good holiday shopping season. Especially with the recent positive momentum towards phase 1 of the trade deal.

Tariffs have only caused 3,826 cuts this year which is up from 1,571 last year. 

A trade deal won’t cause a big decline in job cuts. 

However, an improvement in industrial production will as the industrial goods manufacturers had 63,505 cuts which is much higher than the 22,446 cuts last year. 2018 was a great year for manufacturing in America. The auto industry is feeling the weakness from the global slowdown as it has had 43,025 cuts this year which is up 197% from last year.

Even though job cuts are up modestly this year, hiring announcements are also up. There have been 1.2 million hires which is the most since at least 2014. It’s more than last year even though the year isn’t over yet. This looks good just like jobless claims which were 218,000 in the week of October 26th

That increased 5,000 from the prior week, but was another strong report. Bears can’t get confident until the 4 week average gets above 275,000. It’s currently at 214,750.  

Solid Growth In Q3 Employment Cost Index

In Q3, quarterly growth in the Employment Cost index was 0.7% which increased from 0.6% and met estimates. Yearly growth improved from 2.7% to 2.8% as you can see from the chart below. Wages and salaries growth was 0.9% quarterly and 2.9% yearly. 

Benefits were up 0.6% quarterly and 2.5% yearly. It’s always good to see positive real growth. You can see from the blue line how this expansion has been good for real wage growth.  

6 Month High In Markit PMI

Manufacturing PMI in both the Markit and ISM reports improved in October just like the average of the regional Fed reports. In the Markit report, new orders and production hit 6 month highs which powered the overall PMI to 51.3 which is also a 6 month high. It increased slightly from last month when it was 51.1. This reading was still below the long run average. New orders index has been improving for 5 months straight, making this a positive trend.

Specifically, firms mentioned that clients were having less hesitancy in placing new orders and that market conditions improved. It’s tough to say if this was related to the recent progress on the trade deal or if this is a cyclical upturn. It could be both. 

Improvement in the production index catalyzed the quickest rise in hiring since May. Backlogs were stable, but at least they ended the 3 month streak of declines. Manufacturing firms had highest confidence about growth in the next year since June.

In the comment section of the Markit report, it states, "Tentative signs of renewed vigor are appearing in the US manufacturing sector, with the survey’s production gauge having now risen for three successive months to suggest that the soft patch bottomed out in July.” It would be huge if the manufacturing slowdown has bottomed. This explains the record high in stocks.

ISM Manufacturing PMI Improves Slightly

ISM manufacturing PMI improved from 47.8 to 48.3 as you can see from the chart below. Many were expecting this index to hit 49, so it's slightly disappointing. It missed estimates for 49.3, but wasn’t near the low end of the consensus range at least. There may have been a small negative impact from the GM strike. 

Best part of this report was new orders which improved from 47.3 to 49.1. It’s still in contractionary territory though. Of the 18 categories in this report, 5 had growth in new orders. They were wood products; furniture & related products. Also they were food, beverage & tobacco products; computer & electronic products. As well as  fabricated metal products.

Production index fell from 47.3 to 46.2 and the employment index was up from 46.3 to 47.7. Keep in mind, that when a metric goes from bad to ok, it’s the best possible scenario for stocks. Imports fell from 48.1 to 45.3, but there was a massive increase in exports as the index when from 41 to 50.4. 

Overall the report is consistent with 1.6% GDP growth. If growth comes in that weak, it would be disappointing, but it’s tough to tell where it will be as of today. For about 9 months, I have been expecting cyclical growth to bottom in Q3. If growth falls further, it would be an issue.

3 of the 10 comments mentioned tariffs or the trade war. An electrical equipment, appliances, and components firm stated, “Our business levels have softened over the last three to five months, in the U.S. market [and] globally. Germany and China are both experiencing similar slowdowns. We are in the industrial industry, and the outlook appears to remain soft into Q1 of 2020.” 

Many investors are looking for a turnaround in 1H 2020. It would be bad if this firm is right about Q1 2020 being weak. 

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1 Comment

  • William Braillard

    November 5, 2019

    what is 1H?