ISM & JOLTS Are Solid Despite Citi Surprise Weakness

In my last article, I mentioned the April JOLTS labor report which was released Tuesday. Let’s look at it more closely because it’s known as Janet Yellen’s favorite labor report. Personally, my favorite labor report is the Atlanta Fed’s 3-month smoothed average of wage growth, but everything is worth reviewing. The JOLTS report was good overall, but did have some flaws. As you can see from the chart below, the number of job openings hit a record high. This makes sense because of the increased population since the last peak. Finally, there’s a labor market report which makes sense. It’s perplexing to see the jobless claims report so low considering the increase in population.

As you can see, the number of job openings in April was up 301,000 to 6.044 million. The report isn’t inconsistent with the BLS report because its April report was great; it was the May report which showed weakness. Like the ADP report, the JOLTS showed professional & business services job openings were healthy. There were 1.134 million job openings in that industry which was the highest out of all categories. On the other hand, the number of hires fell 253,000 to 5.051 million. The issue appears to be finding qualified workers. There’s a large difference between getting an education and being qualified for a job because most jobs require experience. The meme millennials know all too well is that firms ask for job experience at entry level positions. Millennials are confused how they can get experience if the first rung of the ladder requires experience.

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Obviously, a decline in hiring makes the number of job openings not matter much because the openings aren’t getting filled. The labor market is so plentiful that there are too many jobs. This should increase wages for the workers who meet the qualifications which is a great sign. Another negative shown in this report is that the number of quits declined. People quit their job when they think they can find a new job with better pay. The more quits, the healthier the labor market. The April quits fell 111,000 to 3.027 million. This one month change doesn’t signal the labor market is weakening because there have been several negative months during this recovery. An issue would arise if next month sees another decline. That’s entirely possible because the May BLS report was week. I’ll hold out judgement until we get the May JOLTS report before I say this is a yellow flag.

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To illustrate the point about quits, the chart below shows the wage growth of people who stay in the same job versus those who switch jobs. Job switchers saw a 4.2% increase in wages as of April, while those who stayed in the same job only had a 3.0% increase in wages. The new trend generation X and millennials have shown is they like to switch jobs. Baby boomers stayed with the same company their whole lives. You can think of this like the NFL. When a player is loyal to one team, the player usually takes less pay than what he’d get on the free agency market. When workers are applying to new jobs, they have confidence they can get a better raise then what their firm offers. It can cause firms to be in flux having so much turnover. This may encourage firms to try to retain their talent more than they currently do in the future. If workers were staying at jobs they didn’t like out of fear of not getting a new one, that would be a signal there’s a weak labor market.

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Another important economic report which was released this week was the non-manufacturing ISM report. It came in at 56.9 which is in line with the previous reports. It fell 0.6 point from last month but is 1 point above the 12-month average. This report is consistent with 3.1% GDP growth which is slightly above where it looks like Q2 GDP will come in at, but it’s not an unreasonable estimate. The ISM has been at a consistent level all year despite the weak Q1 GDP and the rebound in Q2 (assuming the estimates are close to accurate). The chart below breaks down the entire report. In rate of change terms the economy is decelerating, but still growing. I don’t like to look at rate of change as Gospel because the economy is not like a smooth parabola. There are fits and starts. Just because the economy is decelerating, doesn’t make it a trend.

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Let’s look at some of the quotes taken from the ISM non-manufacturing report. Management from a firm in Finance and Insurance said "Business is progressing steadily. No real issues or adjustments to affect annual goals/efforts." It’s interesting to hear this statement because the financials have sold off in the past few months. The KBW bank index is down 10.29% from the March 1st high. It appears the future earnings expectations have changed for financials without any business changes in the near-term. This is a case of stocks being more volatile than the businesses they represent. Sometimes stocks have wild swings while firms chug along consistently.

A retail trade company said, "Overall, business conditions the past month were flat as compared with several months of growth. While levels haven’t decreased, it may be that overall conditions have reached a high watermark." I’m guessing that this firm isn’t one of the brick and mortar retailers which are struggling mightily. It’s probably a discount store like TJX. It’s disconcerting to hear management say the high watermark has been hit. That’s not a signal of confidence.

Conclusion

The Citi Macro Surprise index is negative, but obviously that doesn’t mean that every report is going to be bad. The JOLTS and the non-manufacturing ISM are reasons to be positive. Just like the Macro Surprise index, the ISM didn’t act in concert with GDP growth in Q1. Corporate earnings get the final say in terms of where stocks go. These economic indicators effect the debt market and currency market directly and corporate earnings less so because most S&P 500 firms have a heavy international presence.