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ISM a Leading Indicator of Jobs?
I expect monthly jobs reports in 2016 will shock to the downside. Before I list all the reasons, here's an interesting chart that suggests manufacturing ISM is a leading indicator of jobs.
Upturns and Downturns in ISM vs. Nonfarm Payrolls
The above chart plots percent change in seasonally-adjusted nonfarm payrolls vs. the seasonally adjusted ISM manufacturing index.
Looking at about 30 turning points since 1965, I can only find one key top or bottom where ISM did not lead jobs. Unless manufacturing turns here, 2016 looks to be a rough year for jobs, especially vs. expectations.
Why 2016 Will Shock to the Downside!
Manufacturing is not the only reason to think jobs will sour in 2016. Here's a litany of reasons:
- Manufacturing has been in an outright recession for nearly a year. Contrary to popular belief, production, not spending is the driver for growth.
- Housing is slowing. This was evident even before the construction revisions. Home prices are not affordable.
- Higher minimum wages that take effect in January in many states will act as a huge drag on hiring.
- Many big box retailers including Walmart and Macy's are struggling. Struggling retailers do not build as many stores as they would otherwise.
- Mall vacancies are rising.
- Corporate profits are under pressure.
- The strong dollar continues to hurt exports.
- Inventories have risen far more than sales. This will impact future hiring.
- Auto sales, a key component of spending took a hit in December. The auto party, fueled in part by subprime loans cannot last forever.
- Canada, the US's largest trading partner is in recession.
- Migration issues are straining European relationships. Spillover will affect global trade including trade with the US.
- Interest rates are rising even as GDP weakens. The treasury yield curve and Fed fund futures signal caution.
- Judging from the Chicago PMI, the service economy is weakening dramatically.
- Rent prices and the employee cost of Obamacare have outstripped growth in wages.
Mike "Mish" Shedlock