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Why Markit shows you should ignore the downward economic revision

Part 3
Why Markit shows you should ignore the downward economic revision (Part 3 of 4)

Why Markit suggests the June payroll forecasts are too low

The Markit Non-manufacturing Index assesses the state of non-manufacturing business in the U.S.

The Markit Purchasing Manager’s Index (PMI) is similar to the other regional PMI indices, but it covers the entire country. It’s the sister index to the Markit Manufacturing Purchasing Managers Index. The non-manufacturing 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 the sector in question is generally expanding. Office REITs like Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), SL Green (SLG), and Highwoods (HIW) are particularly affected by the services sector. In many ways, the Markit PMI closely tracks the Institute for Supply Management Purchasing Managers Index. The big difference is that Markit makes more economic forecasts than ISM does.

Markit Non-Manufacturing PMIEnlarge Graph

Services activity rebounded in June in tandem with the Markit manufacturing PMI

The overall index rose to 61.2 in June from 58.1 in May. The index showed that overall activity in the non-manufacturing sector increased again and the pace of growth is accelerating. The manufacturing sector is reporting similar numbers to the services sector, but services employment is much higher. Markit forecasted that payrolls will increase 12,000 in manufacturing and increase between 210,000 and 220,000 in the services sector. Markit reported that firms added staff at a rate not previously seen in the survey’s history, which bodes well for future hiring. The elephant in the room, of course, will remain Obamacare and how it impacts corporate cost structures going forward.

Markit is forecasting a June payroll number of 250,000. Wall Street is forecasting that the ADP report will come in at 208,000 and that the BLS payroll number will come in at 200,000 when they’re released next week. It will be interesting to see if this report causes some upward revisions in the forecasts.

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