Productivity Revised Lower, But PMI Growing – Huh? - Corning (NYSE:GLW)

Productivity and the PMI I’m certainly not here to be a “Debbie Downer” and in all fairness, there could be some real positives in the latest round of economic data. Before I dive into productivity, however, it wouldn’t be a balanced argument if I didn’t fold in Wednesday’s unexpected jump in the Purchasing Managers’ Index (PMI), which showed a reading of 56.3%. This was a 0.8% increase when compared to July’s reading of 55.5%.

The Institute for Supply Management’s (ISM) latest PMI figure was a testament not only to manufacturing growth in August, but continued growth for the 16th consecutive month in the overall economy. (A PMI reading in excess of 42%, over a period of time, generally indicates an expansion of the overall economy). The reading also indicated expansion in the manufacturing sector for the 13th consecutive month. A reading higher than 50% indicates that the manufacturing sector is generally expanding; below 50% suggests contraction.

Eleven of the 18 manufacturing industries enjoyed a positive growth month in August. Here is the list of industries, in order of growth rate:

Primary Metals
Apparel
Leather & Allied Products
Transportation Equipment
Fabricated Metal Products
Electrical Equipment
Appliances & Components
Miscellaneous Manufacturing
Computer & Electronic Products
Paper Products; Chemical Products
Food, Beverage & Tobacco Products
Printing & Related Support Activities

The following industries contracted:

Furniture & Related Products
Petroleum & Coal Products
Nonmetallic Mineral Products
Plastics & Rubber Products
Machinery

According to the ISM’s Report on Business, some sectors were mixed in their sentiment. Here are some excerpts from the survey:

- “Still experiencing intermittent delays in electronic components due to capacity and raw materials.” (Electrical Equipment, Appliances & Components)

- “International sales are especially strong. Domestic business is solid.” (Chemical Products)

- “Orders and business still strong.” (Primary Metals)

- “Order rate has slowed some. Supplier capacity in general seems to be improved.” (Machinery)

- “Large customers reducing pull rates for production.” (Computer & Electronic Products)

So that’s the “good news,” which helped push the markets more than 2% higher on Wednesday… Today, the Bureau of Labor Statistics reported a revised drop in productivity of 1.8% in the second quarter, which was the biggest drop in almost four years and double what was initially reported. Productivity is defined as real output divided by hours worked.

Worker output also grew at a slower pace based on newly revised data, but the hours worked increased 3.5%. Compensation per hour did fall 0.7%, which to me doesn’t support real strength and demand. Real compensation, which is adjusted for inflation (negative at present), was flat. Real hourly compensation has fallen 1% in the past four quarters.

Real output grew just 1.6% in the second quarter, compared with a prior estimate of 2.6%. Output was expanding much faster in Q1 of this year at about 5%.

A decline in productivity can have multiple meanings. The more common theory could be that the economy is slowing, but it could also be that businesses actually need to hire more workers to keep up with demand. When you look at the figures above, the 3.5% jump in hours worked drove the productivity down.

What most would want to see here is continued increases in productivity, which in turn tends to result in higher wages for workers and bigger profits for companies, because those workers have more money to spends on goods and services. Essentially, productivity is the key to an increase in the standard of living. Obviously, coupling the BLS productivity data with other indicators such as unemployment, PMI, spending, consumer confidence, and housing can help us form a solid thesis. Right now, that thesis is still murky. (First time claims for unemployment benefits did decrease by 6,000 in the past week to 472,000, by the way).

The government’s initial reports are frequently revised, remember, which can lead to misinterpretation initially. The overall market did not view today’s productivity data as terribly negative as the major market averages were stable in midday trading on Thursday.

Photo Credit: Tim Patterson

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