ISM employment indices signaling gains

Consumer spending is up, real final sales in the advance Q4 GDP report jumped at its fastest pace since 1984 and the reports out this week on manufacturing and services by the Institute for Supply Management (ISM) show that the economic recovery may finally be kicking into high hear.

I don't want to get swept up in unbridled optimism, as headwinds to growth remain, including the weakness in housing and lingering worries about sovereign debt. But the recent improvement in economic activity suggests that, if history is any guide, a hiring binge by employers may be just around the corner.


(a reading of 50 suggests firms are neither adding to or detracting from staff)

First, a quick disclaimer: monthly correlations between the government’s nonfarm payroll numbers and the ISM Manufacturing Employment and Non-Manufacturing (services) Indices can be somewhat suspect. Still, the trends are favorable and worth highlighting.

Manufacturing has been the unsung hero of what has been mostly a tepid and uneven economic recovery since the summer of 2009 amid the re-stocking of inventories and growth overseas.  And the government’s own data, as well as the ISM survey, reflects an improvement in job opportunities for those looking to produce goods.

But we are not a nation that produces things, as the lion’s share of economic activity in the U.S. occurs in the service sector.  And activity among service providers has been much slower to recover, negating much of the need to boost employment.



Based on recent data from the ISM (see Strong service sector indicates economy is heating up), that is changing.  Further, the closely-followed survey is beginning to detect a pick up employment.

In January, the employment subcomponent, which has been above 50 for six of the last seven months, increased from 52.6 in December to 54.5 in January, the best reading since May 2006!

Because the government and the ISM use different methodologies to calculate changes in the labor force, making a forecast based solely on the ISM’s data is difficult. Still, momentum from the improvement in the economy does appear to be spilling over into the hiring process, suggesting that a significant rise in job growth may be near.