The stock market ignored the dour February ISM non-manufacturing reading, which included the first contraction in its employment gauge in more than two years (see chart). The decline of 8.9-points to 47.5 is the largest since the end of 2008. However, the headline index remained in expansion territory at 51.6 although the magnitude of the latest change fooled economists who had predicted a mild increase in the overall level of business activity.
Chart – Employment contracts
While some respondents blamed the weather, the ISM noted that there was a tinge of caution regarding business conditions and the economy. Response from within the construction industry was clear: “Winter weather is slowing down our projects; it should only be until April.”
Respondents within wholesale trade noted that, “Cold winter weather has had a major effect on us when compared to year-over-year.” Employment losses were suffered in half of the industries surveyed by the ISM. Jobs were negatively impacted in mining, accommodation and food services, health care and social assistance, arts, entertainment and recreation, real estate rental and leasing, utilities, professional, scientific and technical services and within wholesale trade.
The overall downbeat tone to the report was accompanied by complaints over the sudden impact of the Affordable Care Act and a general tepid pace of economic growth. Public services did, however, note that the passage of the spending agreements in Washington had allowed the return of increased public spending. It’s certainly not a pretty picture overall, but as the market is currently prepared to do, we have to rely on the premise that the spring season will mark economic rebound.
However, it followed on the heals of a weaker than expected ADP report.