Manufacturing Spikes & 69% Of Employers See Talent Shortage

Big Spike In Philly Fed

It appears that the manufacturing sector is turning around. It's coming true despite the weakness in China catalyzed by the coronavirus. Empire Fed index increased sharply and now the Empire Fed index increased too. General business conditions index was up from 17 to 36.7 which was its highest reading in 3 years. It beat estimates for 12. This was its largest positive surprise on record. Highest estimate was 14.6; this reading was over double that.

As you can see from the chart below, the new orders index was up from 18.2 to 33.6 which was its highest reading since May 2018. Expected business conditions in the next 6 months rose from 38.4 to 45.4 which was the best reading since March 2018. Boeing is also weighing on manufacturing. But this region clearly isn’t affected by this. 

Outside of places affected by Boeing and the coronavirus, manufacturing is on fire. Remember, the Philly Fed index was up sharply last month as well. The index is up 34.3 points in the past 2 months which is the largest 2 month improvement since September 1995. In the history of this report, which goes back to 1980, there have only been 2 other instances where the 2 month improvement was higher.

Now let's look at the rest of the indicators within this index. Shipments were only up from 23.4 to 25.2. Just like in the Empire Fed index, it appears margins improved. Prices received index rose from 14.7 to 17.1 and the prices paid index fell from 22.1 to 16.4. Despite this improvement, the number of employees index fell from 19.3 to 9.8.

Expectations category did well too. Expected new orders and shipments indexes were up from 41.9 and 42.4 to 54 and 51.9. Even though the expectations index was up, the capex index fell from 32.9 to 29.8. Even though these regional Fed indexes improved last month while the Markit PMI fell slightly, Markit PMI will likely rise this month. 

It should show improvement in the flash report that comes out on Friday. Current estimates are for the manufacturing PMI to fall from 51.7 to 51.4. This index is expected to rise above 52. Services index is expected to rise 0.1 to 53.3. If both increase, the composite index will rise decently.

Tight Labor Market: Jobless Claims Rise Slightly

To recap the recent labor market data, the January labor report was solid and the ADP report was amazing. Job cut announcements report was weak as job cuts spiked. Jobless claims have been low this year. In a recent survey by Manpower Group, which is a job placement firm, 69% of employers reported there being a talent shortage. As you can see from the chart below, that’s the highest total since at least 2009. Data from 2017 isn’t available though. Percentage increased from 46% last year.

President of Manpower Group North America stated “The labor market just gets tighter. There’s a talent shortage. People are realizing that it’s a bit of a crisis.” Personally, I wouldn’t say it’s a crisis, but rather a boon for workers and bad for corporate margins. Obviously, towards the end of 2019, we saw wage growth fall and margins improve. 

Let’s see what happens in 2020 when economic growth likely accelerates. In reference to workers, the president stated, “skilled workers are calling the shots.” It’s not just skilled workers though as workers without a degree and workers in low wage industries are experiencing higher than average wage growth.

In the week of February 15th, the number of jobless claims increased 4,000 to 210,000 which is still very low. 4 week average fell to 209,000 which was a decline of 3,250. We’re seeing a discussion around the fact that there hasn’t been a new cycle low in jobless claims in 44 weeks which matches the longest streak in this cycle which was in 2014. 

However, recognize that this total can’t fall much further. By just staying at this level, it’s actually falling as a percentage of the labor force. 4 week moving average is only 7,500 above its cycle low. I’ve been saying for a few months that we won’t see another cycle low. But that the labor market will stay strong. 

No Recession Indicator From Leading Index

As you can see from the chart below, the leading economic indicators yearly growth rate didn’t fall below 0% in January which means it avoided giving a recession warning again. I predicted this would occur. It's doubtful that yearly growth will ever go below 0% in 2020. Specifically, the monthly growth rate rose from -0.3% to 0.8% which beat estimates for 0.3% and the highest estimate which was 0.5%. Usually this index doesn’t stray from estimates because most of the data in it is already public knowledge before it comes out.

Yearly growth rate improved from 0.1% to 0.9%. Jobless claims helped the index by 0.32%, building permits helped it by 0.26%, and the stock market helped it by 0.12%. It seems like the index will have a good February especially because the great housing permits report we got earlier this week. Let’s see if that strength continues into February. It might be moderately hindered by colder weather.

If you look at the growth in the past 6 months, it’s no surprise it shows a weakening trend because the economy was in the worst of its slowdown in Q4. That’s specifically the case for manufacturing. 6 month average of the leading index was up just 0.1% which is a 0.2% annualized rate. That’s below the 0.8% and 1.6% annualized rate in the prior 6 months. 

Personally, I’m betting the 6 month average growth rate in the next 6 months will be better than both of those readings. That’s in agreement with the ECRI leading index report. Last week it fell 0.8 to 148.2 which sent its growth rate down 1 point to 4.8%. However, it’s still strong.

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