ADP & ISM Non-Manufacturing Index Have A Lot In Common
This morning two indexes were released that confirmed the spate of weakness in the economy which showed up in the 1st quarter GDP. Here are the headlines:
"Employment in the nonfarm private business sector rose 179,000 from March to April on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today." and "The Institute for Supply Management™ Non-Manufacturing Business Survey Committee reported that "The NMI registered 52.8 percent in April, 4.5 percentage points lower than the 57.3 percent registered in March, and indicating continued growth at a slower rate in the non-manufacturing sector."
So, what do these two reports have to do with each other. The ADP report did show job growth today, which is good, however, 179,000 jobs doesn't even fill the number of new entrants into the labor market each month which is why we are still registering employment to population ratio at levels not seen since 1984. However, the bulk of the jobs created were in low paying service sector jobs. This was most recently highlighted by the fact that at McDonald's job fair they received almost 1 million applications for 65,000 part-time and full-time hamburger flipper, minimum wage jobs. I am not knocking those people willing to take those jobs to make ends meet but it goes to the bigger picture of wage decreases accross the board for all Americans when you have 6 applicants for every 1 job opening. This, of course, doesn't bode well for future consumption which is 70% of the Gross Domestic Product (GDP) which may be why that after two years of a statistical recovery the economy is pooping along at 1.8% growth versus a historical level of 6%.
So, while the ADP report showed a pickup in hiring in the non-manufacturing (service) side of the economy the Institute for Supply Management brought forth their report that things are deteriorating rapidly in that very same space. A sharp deceleration in the NMI index in the past month combined with the 6-month averages rolling over doesn't point to significant future strength coming from service side of the economy. Also, as notated in composite index - we may have seen the strength of the fiscally induced statistical recovery reach its apex in the last couple of months.
Why is this important? Economic cycles tend to lead stock market movements. As the economy weakens so does the bottom line of corporate balance sheets. The run since the lows of 2009 has been primarily induced by stimulus from the governement and primarily the Fed. That looks as if now that will be coming to an end as QE 2 is slated to end in June but there has been no discussion, as of yet anyway, of QE 3. My honest belief is that with the REAL economy in a much weaker state than most believe that any retraction of support from the system will lead to economic growth approaching zero in very short order and the Fed will be forced to continue the ponzi scheme to keep what few marbles there are rolling through the system. This will ultimately all end badly but that is a post for a different day.