Economy

An American Tale – It’s the Economy, Stupid

 

As we celebrate Flag Day in the US, and approach the official beginning of summer, it’s a good time to take an objective look at where our economy is, with a focus on the employment side. Where is the best place to get objective data on the economy? The nightly news? LOL.

The federal government’s Bureau of Labor Statistics? They’re okay if you’re willing to dive deep into the numbers, but the unemployment rate they publish monthly provides very little useful information. For example, did you know that if you are collecting unemployment insurance but have not actively looked for work in the past 4 weeks you are not considered to be unemployed? The rate of 4.3% hasn’t been that low in 16 years, for what that’s worth.

One of the most informative indicators to look at (and our personal favorite at KLA) is the Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI). They publish this monthly and it has been a very reliable indicator of current business conditions for a long time. The data is gathered from an industry diverse group of purchasing and supply executives nationwide. The Manufacturing PMI for May 2017 was 54.9, the 9th consecutive month with a reading above 50, which indicates growth. Looking deeper within the 11 separate indices they report, new orders (+2.0%) and employment (+1.5%) had solid increases over April.

Another of our favorites is the Society for Human Resource Management (SHRM) Leading Indicators of National Employment (LINE). Their data is gathered from a monthly survey of HR executives at over 1,000 manufacturing and service-sector firms. The June 2017 numbers show a strong upward trend in hiring at manufacturing firms, with over 65% of companies increasing headcount vs. just 8.6% of companies decreasing. Good news for workers (perhaps not so good for companies) is that the difficulty in recruiting the needed people is increasing even faster than the hiring rate, as is new-hire compensation.

We think it makes sense to look at a mix of micro-level, or more real-time data, along with macro-level, or big-picture trends. Both the ISM PMI and the SHRM LINE fall into the micro-level category. On the big-picture side, we are still looking at around 10-15 more years of a gradual loss of the baby boomer generation from the US workforce. Another factor that has been slowly in the works for years is the shift from offshoring to reshoring. According to the Reshoring Initiative, a nonprofit organization dedicated to assisting companies bring good, well-paying jobs back to the US, the tide turned in 2016. Going forward they expect a net gain in US jobs from reshoring and foreign direct investment, vs offshoring.

What’s the current state of the economy then? We’re giving it a B+ for the employment side, because there is room for improvement in a few areas. Most analysts are forecasting wage growth in the 3% range, which although still modest, could boost consumer confidence and spending throughout the balance of 2017. We need to get our GDP growth out of its long entrenched 2% range, at least to 3%, and then we will consider a higher grade.

 

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