Very Small Firms Losing Jobs Again

We’ve previously discussed how the November ISM manufacturing PMI was weak, while the Markit PMI showed improvement. Even though the Markit PMI hasn’t fallen below 50 this year, it’s not as if the weakness in the ISM reports has been unpredictable. Yearly manufacturing production growth has been negative in 5 of the last 7 months. We will see which November PMI was correct on December 17th which is when the November industrial production report comes out. Either way, the point remains that manufacturing has been in a shallow and wide slowdown in 2H 2019.

According to IIF, this slowdown has occurred because of an inventory overhang. If this thesis is correct, we could see a recovery in the ISM PMI in Q1 2020. As you can see from the chart on the left, the difference between the new orders and inventories index leads the ISM PMI. It bottomed in June 2015 which was ahead of the January 2016 PMI bottom.

In the recent few months, the difference has moved higher as it is positive again. This could lead to an upswing in the PMI. The PMI might join the Markit PMI and the regional Fed reports in positive growth territory. The chart on the right shows, using weight and count, global manufacturing PMIs are rising. This chart uses Markit data which is why it is more optimistic.

Weak ADP Report

The November ADP private-sector employment report was weak partially because of small firms. Specifically, the October reading was revised up by 15,000 to 140,000, but the November reading showed 67,000 jobs created which missed estimates for 156,000 and the low end of the estimate range which was 125,000. It would be a problematic if the BLS report shows similar results as private sector payrolls are expected to be up 170,000 jobs.

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