Employment report sheds further light on manufacturing weakness

Last week’s ISM manufacturing report showed the goods side of the economy was “bordering” on recession. The new orders minus inventories reading is a crude method of asking whether demand is wilting and if the knock-on effect is a rise in stockpiles of goods. The employment report on Friday has also been taken as a wake-up call for the economy, with only 126,000 jobs created during March, which is the weakest reading in more than a year.

As with the ADP private jobs report, the government’s version showed a lack of job creation in the goods producing side of the economy. Looking deeper into the number it’s possible to “prove” that the manufacturing sector suddenly dipped into recession last month. The BLS calculates a diffusion index, which shows the net reading of hiring across 80 industries within the manufacturing sector. A reading above 50.0 indicates expansion, while readings below the division line indicate contraction. During March, as the manufacturing side of the economy shed positions, the employment diffusion index fared its largest monthly decline since June 2008 and dropped by 13.8 points into contraction territory to a reading of 47.5. That’s the worst level since June 2013, but also indicates that this measure is not a simplistic determinant of recession. While it was the category for support activities for mining related to oil services companies that saw the most notable loss of jobs last month, the fact that the diffusion index across 80 industries tipped sharply lower points to broad dollar strength as the real villain here.

Chart – Manufacturing employment falls into contraction