US Non-Manufacturing ISM and ADP Signal Weaker Job Growth

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The U.S. dollar is trading higher against all of the major currencies this morning on the heels of better than expected U.S. economic data. Service sector activity expanded by its strongest pace in 6 months according to the ISM non-manufacturing index which rose to 55.1 from 53.7. While we are encouraged by the increase in orders, business activity, and prices, the drop in the employment component of the report is very disconcerting. As the strongest leading indicator for non-farm payrolls, the employment index of ISM fell from 51.1 to 53.8. Taken together with the ADP report, job growth may not be as strong as economists expect. Private sector payrolls beat expectations but increased less than the previous month. ADP failed to forecast last month’s sharp contraction in job growth but has been fairly accurate in predicting the direction of the labor market. In other words, both the ISM and ADP numbers are telling us that payroll growth slowed further in the month September.

For the Federal Reserve and President Obama, who will be squaring off with Republican candidate Mitt Romney this evening in their first Presidential Debate, there’s nothing more important than jobs. Over the past 5 months, U.S. companies added an average of 87.4k jobs per month, far below the amount needed to offset new entrants. The lack of momentum in job growth is the main reason why the Federal Reserve decided to introduce a third round of Quantitative Easing in September. Having just increased stimulus, we don’t expect the central bank to respond to a weak or strong jobs number. One month of stronger job growth is not enough to get the Fed excited t and if payrolls rise less than 100k, the Fed will repeat their commitment to do more.

Meanwhile, the rest of the world continues to suffer. While the Eurozone PMI Composite and Services indices were revised slightly higher, service sector activity in Germany and France was revised lower. Fragmentation within the euro area is now working in the opposite direction which is bad news for Europe because the peripheral is not strong enough to support the core. Unfortunately service sector activity did not only slow in the Eurozone. The U.K., China and Australia also reported softer activity. It is becoming increasingly clear that growth will be a major problem in the fourth quarter. Central banks are hoping that their latest efforts will carve out a bottom in the global economy but we don’t think it is likely.

Kathy Lien
Managing Director

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