The economic reports of the past several days indicate a slowing economy that continues to grow, albeit at a slower pace. The Federal Reserve's quick response early last year with their rate hike campaign appears to have thwarted an extended hyper-inflation cycle that would ultimately end poorly for the economy with a potentially more destruction collapse.
In this Weekly Brief, we will review several reports that together provide a narrative of a healthy “soft landing” of the economy that many analysts last year feared would be a much worse outcome.
INSTITUTIONAL SUPPLY MANAGEMENT (ISM)
The ISM report is a diffusion index calculated from five of the eleven sub-components of the monthly survey from purchasing managers of approximately 300 manufacturing companies nationwide. It is an early indication of economic activity as purchasing managers adjust their budgets for new merchandise based on their forecasts of orders. An index reading of 50 or higher indicates the sector is growing and below 50 is contracting. In 2019, the sector was already indicating a slowing cycle from the previous three years of strong growth. However, the sector collapsed when the coronavirus pandemic hit in early 2020, and manufacturing production was shut down several times while demand continued to increase. Manufacturing is one of many industries that cannot function with employees working in their bedrooms, like industries such as technology, communication, customer service centers, etc. Workers need to be on the job or at the factory to produce goods, just like other industries such as construction, mechanics, and healthcare.
The sudden reduction of production offset by swings in demand created significant supply disruptions and subsequent wild swings in prices. Once manufacturing was able to restart in mid-2020, the ISM Index shot up to its highest reading since 1985. For the month of March, the index continued its decline since June 2022, dropping to 46.3 and its lowest reading since May 2020. The index dropped below the 50 levels in November 2022 and well below the levels of the past ten years.
The good news is that since 1945, manufacturing has moved through cycles quickly, reaching peaks and valleys of the production frequently and typically recovering within months. We will keep you posted on future reports on this sector.
JOB OPENING AND LABOR TURNOVER (JOLTS) and JOB QUITS
March JOLTS report indicated job openings fell by 632,000 to 9.9 million in February. This is the lowest level since May 2021 but remains at all-time high levels of job openings. Trading Economics provided this commentary:
“Over the month, the largest decreases in job openings were in professional and business services (-278,000); health care and social assistance (-150,000); and transportation, warehousing, and utilities (-145,000). On the other hand, the number of job openings increased in construction (+129,000) and in arts, entertainment, and recreation (+38,000). Meanwhile, the number of hires and total separations changed little at 6.2 million and 5.8 million, respectively..”
Ironically, the number of those quitting their jobs remains at all-time highs. In March, approximately 146,000 people quit their jobs a month earlier, for a total of 4.02 million, while layoffs and discharges (1.5 million) decreased.
The summary of these two reports indicates a still strong labor market and employers' need for more workers. The high level of turnover or quits would also indicate that people are changing jobs frequently for potentially better conditions, location, and/or wages.
What Does This Mean to Me?
The US economy remains stable but has a slowing trend. The historic level of job openings indicates the high demand employers still have to fill openings due to their growth. Jerome Powell, Chairman of the Federal Reserve, has stated the committee's objective of their rate hike policy is to achieve a target inflation rate of 2% and unemployment at 4.5%. Although inflation has slowed significantly from the pace of price increases last year, it still remains well above the Fed's target rate. Even though the increases in wages are slowing, the labor market is out of sync with the Fed's goals, which may take more than a year or a severe recession to dry up the millions of job openings.
We maintain our favorable view of the economy and stock market. The major indices all ended the first quarter with positive gains. NASDAQ, the biggest loser for 2022, has bounced back nicely this year, leading the other indices. Below are how the three majors closed for the first quarter of 2023:
S&P 500: +7.03%
NASDAQ: +16.77%
Dow Jones Industrial Average: +1.83%
Most importantly, the three indices have bounced back from the weak February selloff that did not drop below the previous low reached in December, which currently keeps the indices in their nearly five-month positive trend since October 2022. The S&P 500 is tracking above its 20, 50, and 200 Day Moving Averages (DMA), and the shorter-term DMA are increasing faster than the longer-term DMA. Meaning that the pace of the 20 DMA uptrend is pacing faster than that of the last 50 days, and the past 50 days are pacing faster than the past 200 days.
This trend is also true for the top-performing NASDAQ index as well. Give us a call or send an email if you have any questions about this Brief or your accounts.