Strong Hiring & ISM PMI Improves

Weak Openings & Strong Hiring

The JOLTS report gives us data on hiring, quits, and openings. Two of the three data points were solid. Openings growth was negative because the reading spiked way too high in 2018. A spike made no sense as the difference between openings and hiring hit a record high. 

As you can see from the chart below, openings growth peaked at 23.7% in November 2018. In that month, hiring growth was 6.1%. All those job openings didn’t lead to new jobs. If you look at the data since December 2001, the yearly growth rates in hiring and openings have usually been in line. Divergence in 2018 was highly unusual. In November 2018, there were 7.626 million openings and 5.821 million hires.

A recent few reports have been a normalization process. That’s because hiring has been strong and openings have come off their peak. August openings reading was revised sharply higher which makes the sequential change in September look much worse. 

Specifically, in August openings were revised from 7.051 million to 7.301 million. In September, they fell to 7.024 million which is the lowest since March 2018. Yearly openings growth was -5%. It was the lowest reading since January 2017 which was the trough of the last slowdown in this metric.

Hiring was still strong as it increased from 5.884 million to 5.934 million. The cycle high is 5.991 million, meaning it is very close to the cycle high. This is in line with the recent strength in the monthly BLS report. Yearly growth was 4.7%. It is in line with where it has been most of this expansion outside of the short lived slowdowns. 

Government had a decline in hiring from 396,000 to 329,000 which means private sector hiring was better than the headline reading. Even so its growth was only 4.5%. There were nice increases in manufacturing and healthcare & social assistance hiring. They went from 337,000 and 593,000 to 351,000 and 622,000, respectively. That’s interesting to see since industrial production growth has been weak.

Finally, the quits rate fell from 2.4% (the cycle high) to 2.3% which is still very strong. On an absolute basis, quits have fallen from their peak of 3.668 million to 3.498 million. As a reminder, it’s good to see quits rise because it means workers are confident that the labor market will provide them with a better opportunity if they leave their current job. 

Plus, job switchers have higher wage growth than those who stay at their job. Yearly growth in quits fell from 3.7% to 3.1%. The biggest decline in quits was in accommodation and food services which had its rate fall from 5.3% to 4.7%. That type of decline is normal, so I wouldn’t read much into it.

ISM Non-Manufacturing PMI Improves A Bit

Compared to the Markit services PMI, the October ISM non-manufacturing PMI looks solid even though it’s weak. It’s good to see the PMI improve from a low level; that’s usually great for stocks. Anytime data goes from weak to good, it’s great for returns. This PMI isn’t good yet, but it’s getting there. 

Specifically, it increased from 52.6 to 54.7. That’s below the 1 year average of 56.3. As you can see from the chart below, on a yearly basis, the 6 month average growth rate has been plummeting. Currently, it is -6.8%. Recession average is -12.2%. If the PMI keeps improving like it did in October, this growth rate will quickly reverse course in 2020.

Showing us how mediocre this report was, it is only consistent with 2.1% GDP growth. On the other hand, many estimates expect very low growth, so this is actually good compared to them. Markit composite and the median of 8 estimates see only 1.5% growth. Atlanta Fed GDP Nowcast is projecting only 1% growth. NY Fed Nowcast sees 0.8% growth. Improved ISM PMI could boost the NY Fed Nowcast’s estimate. If GDP growth is below 1%, recession calls will be out in full force.

ISM Non-Manufacturing Components & Quotes

Let’s look at the individual components of this report which were mostly good. 6 fell and 5 rose. But I’d argue the inventories index falling 2.5 points to 50.5 is a good thing. It signals stronger than expected demand caused inventory to grow at a slower rate. 

Business activity index rose 1.8 points to 57. New orders index was up 1.9 to 55.6. 13 industries saw business activity increase and 3 had it decrease. 10 industries had new orders increase and 6 had them decrease. Employment index was vastly different from the Markit report. It saw employment contract and the index fall to nearly a 10 year low. Employment index in the ISM report improved from 50.4 to 53.7. This is important since the service sector employs most workers. Backlogs fell 5.5 points to 48.5 just like the Markit report.

3 of the 9 quotes in the ISM report mentioned trade. Given the recent upturn in housing, it’s no surprise that a real estate, rental, and leasing firm stated, “Business remains brisk and well ahead of last year to date, as we near the peak of our busiest season. Looking ahead, our customers remain upbeat about their business well into next year.” These quotes weren’t as negative as the ones in the manufacturing PMI. That makes sense because it was consistent with just 1.6% GDP growth.

It has been tough to see which sector is driving the economy lower. In the Markit report, the service sector drove the composite PMI lower. On the other hand, the ISM non-manufacturing PMI was much better than the manufacturing PMI.

Conclusion

Hiring growth was strong which is in line with the BLS report. I’m ignoring the decline in openings. ISM non-manufacturing PMI showed modest improvement. It's different from the Markit report which showed the service sector did terribly (especially in the back half of the month). The stock market follows the ISM reading closer than the Markit one. 

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