Weekly Market Update: U.S. Manufacturing Trends and Labor Market Analysis

In the Coming Week:

  • Producer Price Index and Core PPI
  • Consumer Price Index and Core CPI
  • Consumer Sentiment

Weekly Highlights:

  • ISM Manufacturing and Services September
  • September Job openings and ADP employment
  • US employment report

During the past week, major stock indexes exhibited mixed performance, marked by top-heavy trading favoring large-cap growth stocks, especially in the technology and internet sectors. As a result, an equally weighted S&P 500 Index underperformed its market-weighted counterpart by the largest margin since March. Additionally, large-cap growth stocks outpaced their value counterparts, and the S&P 500 outperformed the small-cap Russell 2000 Index by significant margins. In Europe, the STOXX Europe 600 Index dropped 1.18% in local currency as concerns about prolonged higher interest rates led to a surge in bond yields. This decline affected major European stock indexes: Italy’s FTSE MIB fell 1.53%, Germany’s DAX declined 1.02%, France’s CAC 40 Index lost 1.05%, and the U.K.’s FTSE 100 Index slid 1.49%. The Canadian TSX struggled during the week, primarily due to an 8.9% drop in oil prices, impacting the energy sector and overall market performance.

In September, the manufacturing sector of the United States faced its 11th consecutive month of contraction, following 28 months of growth. This information comes from the latest Manufacturing ISM® Report on Business®, which reported a Manufacturing PMI® of 49%, a slight improvement from August’s 47.6%. A PMI® above 48.7% typically indicates overall economic expansion. However, the New Orders Index remained in contraction at 49.2%, albeit slightly improving, while the Production Index increased to 52.5%. The Prices Index fell to 43.8%, indicating a decrease in prices. The Employment Index showed growth at 51.2%, reflecting a modest improvement in employment conditions. Supplier Deliveries Index decreased to 46.4%, suggesting faster deliveries, typical during an economic recovery. Inventories Index increased to 45.8%, reflecting growing inventories. The New Export Orders Index showed slight improvement at 47.4%, while the Imports Index remained in contraction territory at 48.2%. Despite the ongoing contraction, this report indicates that the manufacturing sector improved compared to previous months, showing the best performance since November 2022, when PMI® also registered 49%. Demand remained soft with declining new orders and backlog, but production execution improved as companies prepared for the fourth quarter. Seventy-one percent of manufacturing GDP contracted in September, up from 62% in August. Still, the share of GDP with a composite PMI® calculation below 45% decreased to 6 percent in September, indicating reduced manufacturing weakness. Among manufacturing industries, Food, Beverage & Tobacco Products, and Petroleum & Coal Products reported growth, while 11 industries, including Printing, Furniture, Plastics, and Electrical Equipment, reported contraction. In summary, while the U.S. manufacturing sector continued to contract, there were signs of slight improvement in September, with specific industries showing growth and a reduction in the share of GDP experiencing significant manufacturing weakness.1

In August, job openings in the United States rebounded to 9.6 million, indicating a strong demand for labor as the economy grew steadily. This increase followed a dip to 8.9 million job openings in July, the lowest level over two years. Economists, who had expected 8.8 million job listings, see job openings as a crucial indicator of the labor market’s health and the broader economy. Despite a decline from the record 12 million job openings seen last year, the current numbers remain significantly above pre-pandemic levels. However, Federal Reserve officials had been anticipating a cooling of the labor market by now, as they are concerned that a tight labor market, with more jobs than available workers, could drive up wages and contribute to inflationary pressures. While job openings increased, other indicators suggest a softening labor market. The number of people quitting their jobs remained flat at 3.6 million, reflecting a reluctance to leave positions when the job market becomes uncertain. Notably, job openings surged in white-collar professional businesses, finance and insurance, public education, and manufacturing sectors. The ratio of job openings to unemployed workers remained at 1.5 in August, down from a peak of 2 in 2022 but still above pre-pandemic levels. The “quits rate” among private-sector workers stayed at 2.6%, returning to 2019 levels after peaking at 3.3% over a year ago. The U.S. is expected to add around 170,000 new jobs in September. While businesses are hiring at a different pace than the previous year, they are also not significantly laying off workers. The labor market faces a unique challenge with the worst labor shortage since World War II, and economists and Federal Reserve officials are increasingly considering higher interest rates to combat inflation without causing major unemployment spikes.2

In September, U.S. private-sector employment saw a modest increase of 89,000, marking the smallest gain in two and a half years, according to ADP, a payroll processing company. This figure fell significantly below economists’ expectations, as they had predicted an increase of 150,000 jobs. Nela Richardson, the Chief Economist at ADP, noted a steepening decline in job growth for the month and a consistent wage decrease over the past year. Most new jobs in September were concentrated in the leisure and hospitality sector, including restaurants and hotels, with additional hiring occurring in construction and finance. Conversely, employment declined in manufacturing, transportation, and professional roles. Small and medium-sized businesses increased their workforce, while large companies saw declining employment. While wage growth continued to slow down on an annual basis, wages for job changers (9%) and those remaining in their positions (5.9%) remained above inflation rates. The labor market is loosening, with reduced hiring and fewer people quitting their jobs, possibly indicating concerns about job security. Despite rising interest rates and lingering inflation concerns, there is little evidence of a significant impact on the overall economy or an increase in unemployment. ADP’s employment growth estimate for August was slightly revised upward to 180,000 from 177,000. However, the accuracy of ADP’s estimates in recent months has varied, and their ability to predict the official government employment report remains to be determined. The government is expected to report the creation of 170,000 new jobs in September, including government hires, later in the week.3

In August, orders for U.S. manufactured goods experienced a notable increase of 1.2%, according to the Commerce Department, following a 2.1% decline in the previous month. This growth surpassed economists’ expectations, who had predicted a more modest 0.3% increase in orders. When excluding the transportation sector, orders saw a more significant rise of 1.4% in August, compared to a 0.7% gain in the prior month. Durable goods orders also showed a stronger-than-expected increase of 0.2% in August, as reported in the previous week’s data. This was driven by heightened military spending. Furthermore, orders for nondefense capital goods, excluding aircraft, increased by 0.7% in August. These figures suggest a positive trend in U.S. manufacturing orders for August, with stronger gains than anticipated, particularly in durable goods and nondefense capital goods, excluding aircraft. It indicates potential resilience and strength in specific manufacturing industry sectors .4

In September, the ISM (Institute for Supply Management) barometer measuring U.S. business conditions in service-oriented companies, including retailers and healthcare providers, slightly declined to 53.6%, signaling some economic softening. This reading matched economists’ forecasts and was down from the August figure of 54.5%. An index reading above 50% is considered positive for the economy, which has remained within the 50% to 55% range since the beginning of the year. While there has been a slight pullback in the growth rate for the services sector, most survey respondents remained optimistic about business conditions. However, some expressed concerns about potential headwinds. Key details from the report showed an increase in the production gauge to 58.8%, while the new orders index dropped to a nine-month low of 51.8%, which could be a warning sign of economic weakening. The employment barometer also decreased slightly to 53.4%. The prices-paid index, a measure of inflation, remained unchanged at 58.9%, indicating persistent price pressures, potentially exacerbated by rising oil costs. The U.S. economy is still expanding, and the third quarter may be the strongest of the year. However, there are signs that higher interest rates are starting to limit growth, although the likelihood of a recession remains low. Businesses continue to hire, and unemployment remains near record lows. The data suggests that sentiment in the service sector remains positive, but momentum gradually fades.5

In the latest report, the number of Americans filing new unemployment claims slightly increased to 207,000 but remained close to pandemic-era lows, indicating a robust labor market. These claims reflect minimal job losses and a stable economy. Typically, claims rise towards 300,000 or higher during a recession. Economists had expected around 210,000 new claims. Out of the states and territories reporting, 33 saw a decrease in jobless claims, while 20 reported an increase. Additionally, the number of people collecting unemployment benefits from all programs remained relatively unchanged at 1.66 million, suggesting that most laid-off workers quickly find new jobs .6

In September, the United States added a surprising 336,000 new jobs, surpassing Wall Street expectations and indicating a robust labor market. Additionally, revisions showed stronger hiring in August and July. Economists had predicted 170,000 new jobs for the month. The unemployment rate remained steady at 3.8%. This unexpected surge in hiring could complicate the Federal Reserve’s decision on when to halt interest rate hikes. The central bank has been raising rates to combat inflation but is wary of risking a recession. It is concerned that a persistent labor shortage could lead to higher wage increases and increased price pressures. Despite the strong job gains, there was some relief for the Fed in the report. Hourly wages rose only modestly by 0.2% in September, marking the smallest increase in 18 months. Additionally, the annual wage growth rate slowed to 4.2% from 4.3%, moving closer to the Fed’s target of 2% to 3% to control inflation. Key details of the report include a substantial increase in government employment by 73,000 jobs and the private sector adding 234,000 new jobs. Bars, restaurants, hotels, and healthcare providers were among the leading industries in hiring. The government also revised its estimates for job gains in August and July, showing more robust employment figures in those months. Labor force participation remained flat at a post-pandemic high of 62.8%, which can help reduce inflation by providing a larger pool of job seekers. While businesses aren’t hiring as aggressively as the previous year, the demand for goods and services has remained steady. The labor market continues to face challenges due to the ongoing labor shortage, and the Fed is monitoring wage growth closely to determine future rate hikes. Economists believe that the strong job growth will likely continue throughout the year, maintaining upward pressure on wages and potentially leading to further interest rate increases.7









Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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