Evidence of a Manufacturing Downturn Is Hiding in Plain Sight in Today’s Employment Report
One unfortunate detail that I have not seen discussed yet from today’s BLS employment report(s) comes from the “Establishment” survey. Here’s a LINK. If you scroll to page 5 (Summary table B) and go to the very last line, you will find the one-month diffusion index for the manufacturing sector of the economy. This comprises 81 separate industries out of 266 today industries, so it’s a large part of the entire economy.
50 is a neutral reading for a diffusion index. Below 50, more respondents are seeing decline; above 50, more are seeing increase of whatever is being measured. In this case, it’s job hiring-firing trends that is the variable. One good thing about diffusion indices is that they are not revised often, and not much if they re revised.
The past two months, the manufacturing jobs diffusion index has been right around 39 — quite poor. Two months ago, it was 49. One year ago, it was 54.
Manufacturing does not function in isolation. After all, retail stores (service sector) mostly sell manufactured goods, and advertising agencies (service sector) advise retailers how to bring people to shop at their store or website.
Whether this data point is a leading indicator of the general economy is not something I’ve researched yet. And the effects on investment decisions are mixed, even if one makes much of the topic of this blog post. For example, if one owns a biotech stock, I see no reason to alter one’s view of its proper price based on whether manufacturers are hiring more than they are firing, or vice versa.
But in general, when this measure of manufacturers’ hiring-firing is this low for two consecutive months, it would appear to be a red flag. Unlike the Establishment survey employment data, which undergo extensive revision, this is not revised much (to repeat myself). What are these companies seeing to be so tilted against hiring? Also, what are they seeing that numerous Fed surveys and private diffusion studies are missing, which do not show this much negativity? (My bias is to trust the comprehensiveness of this Federal, nationwide survey over the smaller ones.)
Here’s a “bonus” negative economic indicator I came across today on RealClearMarkets (LINK). This brief post shows an interesting correlation with a recent sharp uptrend in public companies that have decreased or eliminated their dividends. Eerily, if the ECRI call that a new recession (as will be judged or not judged by NBER) began in the U.S. in May or June is correct, than the number of companies with dividend reductions in 2008 and the number in 2012 is similar for the 4th or so month of recession.
Of course, I am “rooting” for there to be no recession now or ever again in the United States. My mindset as an investor, though, is to try to think of upside and downside scenarios that might actually prove to be more correct than the mainstream no-current-recession consensus (which is usually correct, after all), and thus to avoid the “tail” risks of being blindsided by a sudden shift in the consensus that moves markets rapidly and massively against me.
Overall, I see nothing in today’s BLS data that indicates that the Fed will change any of its plans regarding QE 3.