San Francisco Fed unemployment study

Part 4
San Francisco Fed unemployment study (Part 4 of 5)

ISM Manufacturing Survey and payroll growth predict unemployment

The Institute for Supply Management Index assesses the state of manufacturing in the United States

The Institute for Supply Management Purchasing Manager’s Index (ISM PMI for short) is similar to the other regional PMI indices. However, it covers the entire country. The ISM PMI looks at various business indices, like new orders, production, employment, supplier deliveries, inventory, customer inventories, prices, backlog, exports and imports, and capital expenditures. A reading over 50 means that manufacturing is generally expanding. A reading over 42 indicates the economy in general is expanding.

Unemployment rate - LTEnlarge Graph

Homebuilders like Lennar (LEN), KB Home (KBH), Toll Brothers (TOL), Standard Pacific (SPF), and PulteGroup (PHM) are positively affected by strength in the manufacturing sector. Consumer sentiment, which is driven by the job market, is a big driver of home sales.

The ISM Purchasing Managers Index has a 0.24 correlation with current unemployment rates and has a momentum indicator of 0.36. Over the past two years, however, the ISM PMI has been generally falling, while the unemployment rate has been decreasing. The ISM levels from a year ago were predicting an increase in unemployment, according to the model. Current readings, however, are weakly predicting a decline in unemployment.

The Bureau of Labor Statistics Employment Situation Report and payroll growth

The Bureau of Labor Statistics puts out the Employment Situation Report monthly. It contains a tally of jobs created, the number of people in the workforce, the length of the workweek, the number of people employed part-time who would rather be employed full-time, and then a breakdown of the statistics among demographic data.

Here are the individual statistics that will be released.

  • Change in non-farm payrolls (the headline payroll number)
  • Two-month payroll revision
  • Change in private payrolls
  • Change in manufacturing payrolls
  • Average weekly earnings
  • Average weekly hours
  • Change in household employment
  • Unemployment rate
  • Underemployment rate

Payroll employment growth has a correlation coefficient of 0.34 with the current unemployment rate, and a 0.36 momentum indicator. This index is also pointing towards a weakening labor market, with the index reading 0.73 a year ago and 0.36 today. Payroll growth has been stubbornly sluggish ever since the Great Recession began.

The Realist Discussions