Tuesday, November 03, 2009

Liesman’s Calculus

Yesterday, CNBC’s Steve Liesman reported what he termed a potentially “calculus changing” event for the Friday’s employment situation report.

The latest ISM manufacturing employment index breached 50 indicating expansion in manufacturing employment and, as Steve noted, there have been very few instances where total nonfarm payrolls have declined (on either a month-to-moth or year-over-year comparison basis) during periods where the ISM manufacturing employment index is at or over 50.

This would appear to imply that Friday’s number could come in much stronger than anticipated.

Looking at the following chart, you can see quite clearly that Steve is right in his assertion.

The green vertical bars show instances where the ISM index is over 50 but the nonfarm payroll number declined on a year-over-year basis while the purple vertical bars highlight month-to-month instances.

One thing to note from the chart above though is that since 1985 the ISM’s manufacturing employment index has rarely been above 50 so the overall significance of an “ISM vs Employment Situation” mashup may be minimal… but still… the employment index appears to be indicating pretty strongly that manufacturing employment is expanding.

Again though, given the circumstances, it is more likely that manufacturing swung into expansion as a result of the cash for clunker “autos and homes” programs and resultant dynamics and not organic economic expansion.