Wednesday, April 1, 2009

The Other Side Of The ISM Coin

Seems people are fascinated with this presumed ISM "bottom". Some thoughts on that phenomenon per the Rosenbergs.

Manufacturing sector remains depressed

The ISM manufacturing index rose slightly to 36.3 in March versus 35.8 in February. This was in-line with consensus estimates but higher than BAS-ML expectations. This reading is still consistent with a large contraction in manufacturing activity over the month and at levels that continue to depict a sector mired in recession. New orders staged a notable increase but at 41.2 reflect a large pullback in demand and suggest that additional downside is in store going forward. Little improvement was seen in the production, employment, export or import order indexes which all remained at depressed levels.

Inventory correction to weigh on future ISM readings

The inventory index posted a significant 4.8 point drop suggesting that manufacturers are paring back stocks – not surprising given that inventory-to-sales ratios still stand at 12-year highs. Furthermore, the “customer inventories” index posted a 3.0 point increase to 54.0 signaling that companies continue to carry uncomfortably high stocks. Together, these moves point to ongoing cutbacks in orders and production in the months ahead as manufacturers attempt to restore more of a balance between inventories and demand.

And a little more on the unemployment context:

Job cuts catching up with service sector

The ADP employment report showed 742k private sector jobs were lost in March, much worse than the consensus expectation but closer to the BAS-ML forecast for 720k positions cut. The number suggests that Friday’s nonfarm payroll report will also come in worse than the current consensus forecast of -657k (BAS-MLe - 750k). This size of job losses also implies that the unemployment rate will come in above the current consensus forecast of 8.5% (we are at 8.7%). Job cuts continued to be deep in the goods sector at 327k, while job losses breached the 400k threshold in the services sector for the first time in this cycle, as the sector shed 415k jobs in March.

No sign of stabilization

In short the numbers tell us the economy is showing no sign of stabilizing. Of even greater concern is that in spite of these job cuts, unit labor costs are still rising as output drops at an even faster rate. This implies that we have not seen the last of -600k to -700k monthly payroll prints in this cycle. We continue to believe total job losses will top 3.5 million in 2009 – we have seen 1.3 million in January and February alone – and the unemployment rate will reach 10% by mid year. Moreover, given that the vast majority of these job cuts are permanent, dislocation effects – longer job search, retraining etc – suggest the unemployment rate will not come down any time soon.

Of course, optimists will say this is garbage, and pessimists will call optimists idiots, with both camps likely not reading any of the above at all.

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C. Fischer said...

3.5 million lost in 2009? I was thinking more than 5. Assuming March comes in at 700 there are no downward revisions to the previous two months, we're already at 2 million (and these are generous assumptions.) Do we really think the average job loss rate is going to slow to 160,000/month for the rest of 2009?

ts said...

I'm reading it, but i still think the optimists are idiots.

ADP has been very close to the BLS number recently, as one would expect with, ahem, this strong a trend. Looks like a loss of 700-800K and unemployment around 8.6%. Since this is a strong coincident indicator, we shouldn't expect much different from other data outside the normal volatility.

What will be exceedingly important is how business (and to a lesser extent the market) responds to the awful earnings data coming out the next several weeks. If we see a repeat of the mass layoffs of 4th quarter earnings season, we might as well write off the economy until July and look for ways to short any lenders that are still off their knees.

Unknown said...

Love Rosenberg. Can't get enough of this guy.