Huge Difference In Services PMIs
February ISM services PMI was so strong that it was the equivalent to 3% GDP growth. By the way, the Atlanta Fed GDP Nowcast was updated on Friday. It shows 3.1% GDP growth in Q1. If it wasn’t for the coronavirus, 2020 would have been a turnaround year. Q1 growth will depend on how badly the March data hurts the quarter. February Markit services PMI was much worse than the ISM PMI. But at least the final report didn’t change from the flash reading. PMI fell from 53.4 to 49.4. This report is clearly reflecting the weakness catalyzed by the coronavirus.
This was the fastest service sector contraction in 6 years. There was weakness in domestic demand and a big decline in export sales. New business was up slightly, making it the weakest growth in 4 months. New business from abroad fell the most since November. Workforce expansion was the weakness in 3 months.
However, the BLS report was very strong. There was reduced stress on capacity as backlogs fell. You’d think with supply chain issues the reverse would be true as was shown in the ISM report.
Just like the Markit manufacturing reading, the services report showed 1 year optimism increased. It hit a 9 month high, but is still significantly below its long run average. Inflation pressures were low as input and output price growth slowed. Composite PMI fell from 53.3 to 49.6 which suggests the economy is headed towards a recession. That was the weakest PMI since October 2009. PMI went from implying GDP growth would be near 2%, to showing growth will be 0.7%. That’s recessionary.
Chief Business Economist at Markit summarized the report by saying, “The US service sector took a knock from the coronavirus outbreak and growing uncertainty about the economic and political outlooks in February. The fall in the headline index measuring business activity levels was the second largest seen since the global financial crisis over a decade ago, exceeded only by the brief slump in activity during the 2013 government shutdown.”
Investors expect the ISM PMI to fall similarly next month and for the Markit PMI to stay weak. Worst economic reports this year will probably be in March.
Job Cut Announcements Actually Fall
Just like the jobless claims report, the Challenger Job Cut report showed no impact from the coronavirus on the labor market. When these reports show an impact, expect to hear me call for a recession. Now it’s common to hear recession calls. But it’s better not have to rescinda call because of being too negative. It’s better to be accurate than early.
Specifically, the number of job cuts fell from 67,735 to 56,660. That puts the year to date growth rate at -4.2% because job cuts were very high to start 2019. Some called for a recession based on last year’s spike. But the report was too volatile to trust without supporting evidence.
To be clear, January’s report was weak. An improvement from a weak report, just means this was less bad. However, the improvement shows there was no impact from the coronavirus. Job cut announcements come before the weakness in the labor market is felt. There is no indication from the leading labor market indicators that we are in for a recession yet.
Leading economic indicators report in February will likely show negative yearly growth because of the decline in the stock market. But if the stock market’s decline is too negative versus the coronavirus’ impact on the economy, you have to discount it.
Tech was the worst sector as it has had 24,087 job cuts year to date which is up from 2,111 last year. That’s interesting because it isn’t like tech had a great year in 2019. Retail improved from its terrible 2019 as it has had 18,540 cuts year to date which is down 55% from last year.
It’s unfortunate that just as retail was starting to improve, there will be a big decline in consumer spending in the spring because of the coronavirus. The only firms that are insulated from this are those that sell the necessities. There has been a mad rush to Costco recently. It should have good same store sales growth in February.
Initial Jobs Report Summary
In keeping with the theme that the labor market was strong in February, the BLS labor report showed there were 273,000 jobs created which beat estimates for 177,000. This was a blowout report and we saw prior readings get revised higher. January reading was revised up from 225,000 to 273,000 and the December reading was revised up by 37,000. The chart below shows where the jobs were created. As you can see, education and health services led the charge again as it created 54,000 jobs.
Many are wondering if the coronavirus causes healthcare to create more jobs. Leisure and hospitality industry created 51,000 jobs which won’t continue in March. With the declines in travel, this industry will likely have job losses in March. It remains to be seen if the weakness there is great enough to end this record long streak of job creation. It should be close.
Retail trade lost 7,000 jobs. The industry would have had a better year than 2019 if it wasn’t for the coronavirus. A best case scenario is weak retail sales growth in March and April. Worst case is weakness all year and in 2021.
Personally, 4 weeks ago I thought Q1 GDP growth was going to be weak. Turns out, I was wrong because the data in January and even some of it in February has been strong. If it wasn’t for the coronavirus, we could have had above 3% GDP growth.
Since the consensus expects the economy to fall off a cliff in March, my initial estimate of about 1.5% GDP growth could be where we end up. Labor market data shows the economy would have had a monster 2020 if it wasn’t for the coronavirus.
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