More Mixed Messages

Yesterday I reported that the news generally supported the view that we are well into recovery, albeit we are still in its early days. Today the news is decidedly more mixed. Such is life at this point of an economic cycle. The two data points we have to chew on today are the Institute of Supply Management non-manufacturing survey – the one we discussed yesterday was their manufacturing survey – and the ADP payroll figures.

First the ISM survey.

The main point to take away from the decline in the index, from 50.9% in September to 50.6% in October, was that the services sector is still very cautious about the outlook for next year. The biggest reason the index declined was that employment levels reported by the companies surveyed fell sharply. So to the extent that we have already absorbed the bad job situation from last month there is no new information to be extracted from the data. I think it is important to recall that the services sector typically lags behind manufacturing during the course of a business cycle. So that the sector is still hunkered down in a very defensive posture is not at all surprising. Yesterday’s news from the ISM told us that manufacturers are, at least for now, ramping up production. As they continue to do so they will start to need the support of the service sector, so we should expect the latter to experience some form of recovery later this year or maybe early next.

More important still is the simple fact that services dominate our economy, and account for the vast majority of jobs. So the ISM survey is capturing the mood of the employers who we are relying upon for the major portion of the new jobs we hope will be generated next year. Their continued gloom isn’t much of a good sign.

Still we can hope that this index shows life over the next few months: if it is truly a lagging factor then its current state should not shock us too much.

The second piece of news today is the ADP payroll report.

As I have stated here before this is data published by the payroll processing company ADP and is useful as a predictor of the government’s release of the unemployment data later this week. According to today’ report the economy shed a further 203,000 jobs in October, down from September’s loss of 227,000. Last month was also the least number of lost jobs since July 2008, so I suppose we can glean some comfort from them.

The job losses were mainly in manufacturing, down 65,000; construction, down 51,000; and services, down 86,000. So the entire economy suffered. It is interesting to note that this continued loss of jobs comes even though activity as measured by GDP clearly has reversed course: once again I remind you that employment lags the economy by several months and often by several quarters. We will not see any substantial change in the job outlook this year.

The bleak news is that we have lost about 7.2 million jobs so far during this downturn, and are likely to accumulate a few hundred thousand more losses before we see job growth.

Taking today’s news as a whole I think we can look past its disappointing content and argue that both sets of data are in line with what we would expect. So there is no need to panic, but there is a need to keep firmly in mind that this recovery is still both early and tentative. We need to start seeing much more clear and general signs of improvement over the next few months. In particular the steady erosion in employment has to halt. The private businesses that fuel the economy are still engaged in a self destructive ‘beggar thy neighbor’ attempt to keep their own profits high by cutting expenses to the bone. Those cut expenses used to be someone else’s profits of course. As long as they use this as their only tactic they will ensure further overall decline, and Keyne’s famous ‘paradox of thrift’ will drive us back into recession.

As long as the private sector continues this pattern we will need the government to support the economy. The next few months will determine whether we have succeeded in getting self sustaining growth re-started, or whether we need more stimulus.

As I stated yesterday I think we need that extra shove of new stimulus anyway: the private sector needs jolting back to life.

The sooner the better.