Manufacturing activity is picking up in the U.S., according to the latest Institute for Supply Management survey, a closely-watched barometer of the industrial side of the economy that was released Tuesday. The ISM index showed that the sector continued to grow in May, and that hiring activity increased as well, both of which are good signs for the U.S. economy. However, Tuesday also saw the release of the Challenger Gray & Christmas report on planned U.S. layoffs — and the message it appears to be sending is somewhat less rosy.
The ISM purchasing manager's index came in at 62.8 for May, which was higher than most economists were expecting, and also higher than the 62.4 it hit in April (anything over 50 indicates that the manufacturing sector is growing). The latest figure is the highest for the index since it hit 63.6 in January, and is the second highest since the index hit 66.8 in December of 1983. The ISM measure has now been higher than 60 for seven months in a row, which most economists say is a sign that the recovery is well under way.
One part of the index that generated a lot of comment from economists was the employment sub-index, which rose to 61.9 from 57.8. May marks only the second time that the index has been above the 60 mark since 1983, and the highest reading for that part of the ISM since April of 1973 — in other words, it is higher than it was in either the economic recovery in the early 1990s and the recovery in the mid-1980s. "Employment was probably the major driver at helping the index stay as strong as it is," said survey director Norbert Ore.
While the level of activity overall and the level of hiring were both encouraging — especially after the long drought that has existed in both areas — Mr. Ore sounded a note of caution about the likelihood that these levels might continue over the long term. "Statistically it's rare that we've ever been in this situation," he told Market News. "With pricing pressures the way they are, I just have to believe that some of the deceleration that's going to take place in manufacturing will have to come sooner rather than later." The "prices paid" part of the index is at a very high level, he said.
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The ISM employment sub-index led some economists to speculate that Friday's U.S. jobs report could come in stronger than expected (the consensus is for about 216,000 new jobs). Analysts say the stock market will be watching the number closely for signs the recovery is starting to create sustainable growth. Until recently, new jobs were the missing ingredient in the U.S. economic turnaround, and some bears speculated that without sustained job creation the consumer sector might lose some of its strength.
Even if the Friday jobs figure is as strong as expected, however, it should be taken in context with other job-market readings, and one of those is the Challenger, Gray & Christmas report. The job placement firm's survey tracks the layoff plans of major U.S. companies, and while it is seen as an "anecdotal" rather than a scientific survey (it is based on news reports and public announcements of layoffs), it is still a useful picture of the flip-side of the hiring equation. In its latest report, the firm said that layoff announcements in May were up 1.6 per cent to 73,368 compared with April.
That marks the second month in a row that layoff announcements rose: in April, layoffs were up 6.1 per cent over the previous month. While April's level looked a lot better than the same month a year ago (it was over 50 per cent lower than April of 2003) May's layoffs were up by 6.9 per cent when compared with the same month of last year. While a move such as that isn't evidence of a great calamity when it occurs in a single month — particularly in an index that isn't adjusted for seasonal fluctuations — it is still worth watching, the firm says.
While job cuts overall are down, Challenger CEO John Challenger said that there were some "worrisome trends" in the May report. For one thing, he pointed out that the monthly average so far this year is more than 81,500 lost jobs, and the average before the recession was closer to 51,000. The report also continues to show increased job cuts in the retail, financial and industrial goods sectors of the economy, which Mr. Challenger said was "not what one would expect in a strong recovery."
The Challenger report doesn't necessarily mean that the job recovery is in jeopardy, nor does it mean that the strength of the Friday jobs report should be in question. But it does seem to suggest that there is still more than a little weakness left in the economy, particularly in the retail sector, and that is something both economy-watchers and market-watchers may want to keep a close eye on in the future.