Economic News Comment for Monday 11/2/09

The ISM Manufacturing Index was out this morning and was reported better than expected at 55.7. (Anything above 50 is considered expansionary). However, the big surprise in the report was the employment sub-index which came in at 53.7, up 7.0 points from last month. It was the first time above 50 in over a year.

In the past 30 years, with over 350 monthly reports in the archives, there have been only 3 times that the employment sub-index has been over 50 and we didn’t create new jobs in the monthly Employment Situation Report which will be released on Friday. At this time, the trade is estimating we will lose between 55,000 and 200,000 jobs in the upcoming report. This may end up being the 4th time in 30 years that we lose jobs with a 50+ reading, but it does suggest that rising employment is just around the corner.

Also in this report, it appears that inventory destocking has run its course and we are starting to restock at the manufacturing level. This should also mean more hiring.

Another indicator is the quarterly productivity report. Much of the gains in corporate earnings have come from cost cutting and employee layoffs. That means getting more out of one’s existing workforce either through lower wages or greater gains in per unit labor output.

Since wages have held steady, it implies that most of the gains have come from increased productivity of the workforce. In the second quarter, overall productivity gains were 6% higher. In the past 30 years, we have never had productivity this high without positive gains in employment growth. Thursday, we will get the first look at productivity growth for the 3rd quarter. Another large gain is unlikely as it is difficult to continue to get this level of growth out of employees on a continuous basis without seeing an increase in employment.

This recession has been the most severe since the Depression of the 1930’s so maybe Friday’s employment number will still show a loss of jobs. However, don’t be surprised if the number fools everyone and shows a positive gain of 50,000. If it does, the stock market will rise sharply.