Strong Markit PMI Services

The Markit PMI services index was similar to the manufacturing survey. Its final reading was very close to the preliminary mid-month reading.

Final October reading of 54.8 beat the consensus and mid-month reading of 54.7. It beat last month’s report which was 53.5. Improved PMI is sharply divergent from the stock market. That’s declining because of fears of a slowdown.

To be clear, the stock market is worried about 2019. However, a solid economy in October increases the odds of a strong economy in the first quarter of 2019.

New orders, backlogs, input costs, and selling prices are all increasing. This signals demand is strong and there are capacity constraints.

Production growth increased after weakening in September because of hurricane Florence. Hiring increased at the slowest rate in 9 months. Firms are having a tough time finding qualified candidates. To be clear, this isn’t consistent with the overall labor market.

As you can see from the chart below, the year over year growth in total nonfarm payrolls has been increasing since late 2017. Even though growth slowed slightly in October, 250,000 jobs added is much higher than the 2018 average of 212,500.

The big battle here is whether employers really can’t find workers or they are just stingy. It’s obvious that if an employer raises wages, at some point there will be an influx of qualified applicants.

The key is measuring workers’ sensitivity to wage hikes because there is a limit to how much employers can pay workers.

Strong Markit – Contextualizing ISM & Markit Reports

Combined with the manufacturing PMI, the total Markit PMI came in at 54.9. That’s up 1 point from September and down from 55 in August.

The Markit reports see no slowdown. PMI is consistent with 2.5% Q4 GDP growth which is below most estimates. This report is the pessimistic cousin of the ISM report. That’s been predicting higher GDP growth than what is reported.