Service sector sluggish but still growing

The ISM Service Sector Business Activity Index fell last month, but remains comfortably above 50, suggesting that the sector continues to expand, albeit slowly.

This next chart compares the ISM Service Sector Composite index for the U.S. to that of the Eurozone. The U.S. continues to grow, but the Eurozone continues to contract. Weakness in Europe may be contributing to sluggish activity here, but the U.S. has not contracted the Eurozone flu.

The relatively high level of the prices paid index suggests that the U.S. is more likely to be suffering from too much money than too little. Despite sluggish economic activity, there is clear evidence of inflation. The Fed may be overstaying its welcome in QE territory; we're more likely to see higher inflation than lower inflation in the years to come.

The one bright spot in today's ISM release was the employment index, which showed a decent gain. This suggests that economic activity is still likely to expand in the future.

Altogether, not much in the way of new news here. It's steady as she goes, at a relatively slow pace. A disappointingly weak recovery, but still a recovery.

The iPad mini is a winner

I just got my iPad mini, and my first impression is very positive. It's very light and easy to hold in one hand; the fit and finish is very high quality, and it's very solid. The screen is not as sharp as the iPad retina, but it's definitely acceptable. The camera is excellent. Reading a book is now easier on the mini than on the larger iPad. All the apps I have on my iPad retina work just fine on the mini. The size seems ideal for content viewing and reading. This is not a laptop replacement, but it is something that's so easy to carry around and so versatile—much more so than the Kindle—that this will be a constant companion for many people—doctors, for example.

Only one problem: It's going to be hard for Apple to make these fast enough to satisfy Christmas demand.

5 million jobs and counting

The economy has generated about 5 million new jobs since early 2010. The pace of jobs growth has been disappointing, but it has been relatively steady. More importantly—since the market is still very fearful of another recession—there are no signs here of any emerging weakness. Private sector jobs growth is decent, but not strong enough to result in any meaningful decline in the unemployment rate, which remains high. 

This chart shows the total number of jobs according to the Establishment and the Household Surveys. Both are showing a net gain of about 5 million jobs since early 2010. That works out to a little over 150,000 jobs per month on average.

This chart of the labor force (those who are working plus those who are looking for work) shows that it tends to grow about 1% per year. One salient feature of the current recovery is the lack of growth in the labor force—the result of approximately 7 million people apparently deciding to "give up" looking for a job. However, in the past year the labor force has resumed its trend growth rate of 1% per year and has reached a new high. On the margin this is a modest positive, since it reflects increased optimism and a more dynamic workforce.

If the 7 million people who have given up looking for work should decide to get back in the hunt, the unemployment rate would jump to something like 12%. Most of the decline in the unemployment rate during this recovery is due to the unprecedented number of people who have dropped out of the labor force.

This chart shows only private sector employment, by excluding the 20-22 million people who are employed by various levels of the public sector. Note how much more volatile the household survey is. On average, both surveys are saying the same thing, and they are consistent with an economy that is growing at a 2-3% pace. That growth rate can be decomposed into 1.5-2% jobs growth and 1% productivity growth. Nothing to write home about, but neither is it something to disparage.

This chart compares private sector to public sector jobs. This recovery has seen a substantial decline in public sector jobs (about 600K), but the declining trend appears to have stalled. Public sector jobs are flat year to date. This suggests that state and local governments have managed to bring their expenses more into line with their revenues, and that is another positive change on the margin.

Construction spending still weak, but improving

Construction spending in September was up 0.6%, and in line with expectations. As these charts show, construction spending on both nonresidential and residential structures is up 14% from last year's low. After years of a disastrous decline, construction is now expanding faster than the overall economy. The sector is still very weak, but on the margin things are getting better.

Layoff activity remains relatively low

New claims for unemployment have been relatively flat this year, down about 8% or so from year-ago levels. This is consistent with continued, albeit sluggish, economic growth. The Challenger tally of announced corporate layoffs (second chart above) tells a similar story. Nothing much happening here, but at least there's no sign of any deterioration in the economy.

If there is one bright spot in the labor market, it is the ongoing decline in the number of persons receiving unemployment insurance: 20% fewer people today (1.3 million) are receiving unemployment checks than were a year ago. This motivates people to find and accept a new job, even one paying less than they would have liked. In a slow-growing economy, this is unfortunately the only way that excess labor can be absorbed: the price of labor has to decline. Extended unemployment insurance payments only serve to slow that process.

ADP employment report only modestly positive

ADP has revised its methodology, and this appears to have improved the ability of its estimate of private sector jobs growth to predict the BLS establishment survey of jobs growth. This suggests that tomorrow's private sector jobs number could be modestly higher than expected (158K vs. 124K).

The first chart above is from last month (September data), before ADP changed its reporting and forecasting methodology. The second chart uses the new and revised data through October. To my eye, the new ADP series more closely tracks the BLS data, especially in the past year or so. If this holds up, then it means that tomorrow's jobs report should be somewhat better than expected. Even so, jobs growth of 160K is only enough to absorb new entrants to the labor market, and far short of what it would take to bring about a meaningful reduction in the unemployment rate. So I wouldn't expect another decline in the unemployment rate, and I note that expectations call for it to rise from last month's 7.8% to 7.9%.

The outlook for economic growth remains uninspiring, but the good news is that there is no sign of deterioration. But since the market remains braced for bad news, this dull news ends up being good news.

Manufacturing doesn't deteriorate, and that is the good news

The ISM manufacturing report came in slightly better than expectations, but remains lackluster. 

As the chart above suggests, the ISM manufacturing index is consistent with real GDP growth of 2 or maybe 3%. It's steady as she goes, and she isn't going very fast. Nothing new to see here.

Export orders continue to show some weakness, which is not surprising given the struggles in the Eurozone and the slowdown in China that have been widely remarked. Still, the recent readings are not weak enough to point to any serious problems, and the latest news from China—where the purchasing managers' index has been around 50 for the past several months—suggests that the slowdown has not worsened.

The prices paid index points to mild inflation pressures, nothing unusual.

The employment index has been only mildly positive for the past year. This suggests that manufacturing is not likely to pick up meaningfully nor deteriorate in coming months.

Add it all up, and it looks like the producers and risk-takers of the world have pulled in their horns in an attempt to brace for the uncertainty of the looming fiscal cliff. As a supply-sider I strongly reject the notion that the problem we have today is one of insufficient demand. On the contrary, the problem is insufficient "supply:" a dearth of new investment, risk-taking and work. Those are the things that create new jobs, and new jobs are the things that result in increased demand.

These facts do not paint a rosy picture of the future, but neither do they point to any meaningful deterioration on the margin. And that is the good news, since the market remains braced for bad news. 10-yr Treasury yields of 1.7% only make sense in a world where markets hold out very little hope for meaningful growth and indeed fear that another recession is practically unavoidable. As long as the economy avoids a recession, risk assets are going to continue to rise, albeit slowly.