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PMI and ISM Services Indices

Markit’s Services Purchasing Managers’ Index maintained the strength it exhibited in August, edging slightly lower from 55.0 to 54.6 in September. New business led this index higher, particularly from foreign clients where economies reopened sooner than ours. As a result, employment picked up as well, but confidence in the outlook fell to a four-month low over concerns of a second wave of the pandemic. Input costs also rose, but they were more than compensated for in higher selling prices. I expect this index to soften in the fourth quarter, as the pandemic weighs on consumer demand and improvement in the labor market slows.

Source: IHS Markit

The ISM Services Index climbed from 56.9% in August to 57.8% in September, reflecting a fourth consecutive month of growth in the service sector. The absolute number doesn’t equate to a certain level of strength in the rate of growth, but the fact that a larger percentage of survey respondents are seeing business conditions get better. New orders and production improved during the past month, and employment returned to growth for the first time since the pandemic started. The ISM index is now closely aligned with Markit’s index. Still, both reflect a much lower level of output than pre-pandemic.

Source: MarketWatch

Unemployment Claims

The economy may start losing more jobs than it is recovering in the fourth quarter, as a new wave of layoffs starts to mount. Initial claims fell a modest 9,000 last week to 840,000, which was higher than the 820,000 expected. The number filing under Pandemic Unemployment Assistance fell to 464,437, resulting in total claims of 1.27 million. The steady improvement from the peak level in March has clearly stalled.

Source: MarketWatch

There was good news in continuing claims, which declined by one million to just under 11 million for the week ending September 26, but we have to account for those receiving benefits under Pandemic Unemployment Assistance. That boosts the total number to 25.5 million, which is still a staggering 16% of the workforce.

Source: MarketWatch

JOLTS Report

The Bureau of Labor Statistics indicated that there were 6.5 million jobs available to be filled in its latest Job Openings and Labor Turnover Survey for August, which was down 242,000 from the prior month. That number is moving in the wrong direction for a recovery. The largest decreases occurred in industries most impacted by the pandemic, such as food services and accommodation. A rise in the number of new cases of coronavirus will lead to even fewer job openings in the months ahead if consumers cut back and businesses are not allowed to expand their reopenings.

Source: Bureau of Labor Statistics

Conclusion

Many of the recent high-frequency economic reports continue to show strength, but that strength is running on the fumes of the CARES Act. Those fumes have all but dissipated as of today. Meanwhile, the second wave of coronavirus sweeping the globe, as well as the U.S., looks to be more ominous than the first because of the high baseline from which it has started. Investors don’t seem to be discouraged, because they are assuming another round of fiscal stimulus is inevitable. While it may be inevitable, the timing is still very uncertain. I believe that if we don’t have that stimulus before the election, we run this risk of not seeing it until the beginning of next year. That is likely to result in another economic contraction in the fourth quarter of this year.

Source: New York Times

This is the greatest downside risk for a stock market that has already priced in a safe and effective vaccine at the end of this year and an earnings recovery in 2021.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.