Investors shrugged off a weak manufacturing number from the Institute for Supply Management—the so-called PMI—because Friday’s jobs number was good. Perhaps they should have been a little more circumspect.
The jobs report dominated the day on Wall Street. The Dow Jones Industrial Average rose 301 points, or 1.1%, to 27,347.36 on Friday, finishing out the week 1.4% higher—just 12 points away from an all-time high.
Investors shouldn’t get complacent, though. The ISM data had some worrisome trends about the U.S. employment situation.
The overall PMI number registered 48.3, a little higher than the 47.8 September reading (which was reported Oct. 1). A level of 50 indicates growth. Manufacturing is contracting, but at a slower rate than last month.
“Sentiment is definitely better than last month’s survey,” Timothy Fiore, chairman of the ISM survey committee, told Barron’s. What’s more, the General Motors (ticker: GM) strike and the Boeing (BA) 737 MAX grounding had an impact on survey responses, creating some noise.
The GM strike is done and Boeing said it wouldn’t reduce MAX production again when it reported earnings on Oct. 23, late in the month. That’s not a final decision on the MAX, however, as the plane remains grounded world-wide.
Still, despite the incremental improvement, some things in survey responses concerned Fiore.
“The employment situation was a concern,” Fiore said. The number of negative comments about hiring is rising. He characterized about 40% of the October employment survey comments as negative. “People are dropping [work] shifts, canceling overtime, sending temporary workers home. It’s a sign things aren’t what they were.”
The employment portion of the ISM index registered 47.7, a 1.4-point increase from the September reading of 46.3. Like the overall manufacturing index, employment is contracting but at a slower rate than September. “I think a lot the [layoffs] are flying under the radar—no one wants to impact consumer sentiment, no one wants to announce cuts around Christmas,” Fiore added.
The rising rate of negative comments might be the proverbial canary in the coal mine—an apt metaphor for heavy industry. Unemployment is still low, but trade conflict and labor conflict are staring to dent the economy is a very tangible way: diminished job creation.
The U.S. added 128,000 jobs in October, bringing the year to date total to about 1.6 million new jobs. Manufacturing, however, has added just 2,000 jobs in 2019. Last year, the U.S. added 264,000 manufacturing jobs. And manufacturing job growth was negative in September and October, mirroring the ISM survey results.
There are about 13 million manufacturing jobs in the U.S. and about 150 million jobs overall, according to Bureau of Labor Statistics data. Manufacturing accounts for less than 9% of total employment.
Of course, it makes some sense that manufacturers are tightening belts as order activity falls. The manufacturing economy decoupled from the service economy a few months ago. Many industrial companies talked about weakening demand on third-quarter earnings conference calls.
Investors, however, should pay attention to the trend to make sure a manufacturing-employment issue doesn’t become a consumer-spending issue.
Write to Al Root at allen.root@dowjones.com
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November 04, 2019 at 05:30PM
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Manufacturing Data Flash Warning Sign for U.S. Jobs - Barron's
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