ISM vs Employment

Back briefly to the employment report: Our friend Barry Ritholtz has found a pretty strong correlation between the employment report and the ISM manufacturing index. In April, the ISM came in at 60.4; in May, 59.7. Going back 40 years, this index turns in a reading of 60 only about 10% of the time.

So the ISM has likely topped out. Now… the year-over-year change in nonfarm payrolls tends to lag by about seven months. Move that figure up by seven months, and the resulting chart looks like this.

“ISM has rebounded to around 60,” Barry says, “while employment, though certainly up sharply year over year from the trough, still has far to go in this game of catch-up.

“The point is this -- is this as good as it gets? I have maintained that some releases (like ISM manufacturing, for example) seem to be flashing late stage before employment has had any opportunity to climb out of its ditch.

“Should this trend continue, and I suspect it may, it does not bode well for the sustainability of this ‘recovery.’”