ISM PMI - Best Reading Since 1998
The non-manufacturing PMI was 61.6 which surpassed the consensus of 58. Out of 65 economists making predictions, the highest estimate was 59.6.
This was a 5 standard deviation beat. It was much better than the prior PMI which was 58.5. As you can see below, this was the 2nd best reading in the history of this report.
This report was started in 1997. Business activity index increased 4.5 points to 65.2. New orders index was up 1.2 to 61.6. Employment was up 5.7 points to 62.4. Imports were up 3 points to 55. Prices were up 1.4 to 64.2.
This report was perfect. The only problem is if it’s accurate. It’s too good to be true based on the hard data and even surveys like Markit.
This report corresponds to an impossible to imagine 4.6% GDP growth rate. I know that Q2 growth was 4.3% which is close to that, but none of the estimates for Q3 are that high.
It’s also important to point out that one big reason why some estimates are expecting about 4% growth is that they include these ISM surveys in their prediction.
You can’t use a prediction which includes the ISM PMI as justification for why these reports are accurate. I think the Markit estimate of about 3% GDP growth is more realistic.
ISM PMI - ADP Report Beats Estimates
The September ADP report beat job growth estimates. It’s in tune with the retail wage increases as it shows the labor market is quickly tightening.
As you can see from the chart below, it rebounded from the weakness seen in August. The ADP report hasn’t been correlated with the monthly BLS report especially recently. Therefore, I’m careful to proclaim the BLS report will also beat expectations.
Since we don’t have the official BLS number yet, it’s fair to celebrate this positive report until Friday morning.
The August ADP report was revised to show 168,000 jobs created instead of 163,000 jobs. But it still was a disappointment and below the BLS reading.
In September 230,000 jobs were created which beat estimates for 179,000. It also beat the high end of the range which was 215,000. This was the most private sector jobs created since February 2018.
Each part of this report was solid as 56,000 small business jobs were created. 99,000 mid-sized business jobs were created. Large firms created 75,000 jobs.
Very small businesses added 35,000 jobs and other small firms created 21,000 jobs.
Many reports have shown the manufacturing sector struggling to create jobs. This survey shows the goods-producing sector added 46,000 jobs and manufacturing added 7,000 jobs.
Each segment is doing as good as you can expect except information which lost 3,000 jobs. The overall service-providing sector added 184,000 jobs.
The two best segments were professional and business which added 70,000 jobs and education and health which added 44,000 jobs.
ISM PMI - Tail Of Two Cities
The September Markit PMI hit its lowest level in 8 months. The ISM non-manufacturing PMI composite hit the highest level since 1998. The ISM non-manufacturing business activity index hit a 14 year high and employment hit a record high. That’s quite the divergence.
The ISM readings have been diverging from other economic indicators as well. The most important divergence is in relation to the hard data such as the industrial production report.
Most PMI readings forecast GDP growth that’s way higher than what actually is reported. I’m contextualizing these reports. It's important you don't ignore the Markit reading and just go with the ISM report. That’s what the market is doing.
For investors focused on intermediate-term returns, the truth matters more than opinions based on overly optimistic surveys.
ISM PMI - Markit PMI Beats Estimates
It’s interesting to be discussing the Markit reading in such a negative light when it actually beat estimates. That’s because it shows modest growth instead of the best performance since 1997.
The Markit services PMI was 53.5 which beat estimates for 52.9 but fell from 54.8 in August. Expectations were low because the flash reading was weak.
Just like last month, there was a modest rebound in the second half of the report. The flash reading was 52.9. This report doesn’t show contraction, but it’s the weakest reading in 8 months. Final Markit composite reading was 53.9 since manufacturing outperformed services.
One positive part of this Markit reading is that job creation was the fastest since June 2014. The inflation reading hit a record high. Economic growth is the weakest since January, but the composite index still implies close to 3% GDP growth in Q3.
It also implies non-farm payrolls growth of 200,000. As you can see, it’s not as if the Markit reading was incredibly weak. However, it’s weak enough to question the action in the stock market and the long bond.
ISM PMI - Retail Workers About To Be Paid More
Amazon raising its minimum wage is a signal the labor market is getting tighter. The fact that Jeff Bezos is the richest man in the world and Amazon’s employees can barely make ends meet is a PR issue.
It was helped by this pay hike, but the main reason Amazon raised wages was because it had to. Each time a firm raises wages, competitors need to keep pace.
As you can see from the chart below, Amazon has the highest minimum wage on this list of major retailers. It’s impressive that Amazon has jumped ahead of Costco. Costco is known for focusing on paying its employees living wages and having low prices in the clubs by limiting its profit margins.
Target will get to $15 by 2020, but Costco will likely get there sooner.
Since Wal-Mart has the most workers in America, it has the most difficulty in raising wages. The pressure on Wal-Mart to eventually raise wages further will increase. It probably won’t get to $15, but it will get close soon.
The politicians acting as if this is the best possible scenario don’t understand that there’s no free lunch. This will increase inflation. Real wage growth will only occur if other prices are steady.
Disclaimer: Neither TheoTrade or any of its officers, directors, employees, other personnel, representatives, agents or independent contractors is, in such capacities, a licensed financial ...
more