A significant amount of economic data came out last week.
Earlier in the week, disappointing private jobs data came out, followed by the worst manufacturing report in a decade, and a weaker-than-expected service sector report, evidencing slowing economic growth on a broad basis and increasing recession risk.
Later in the week, government payroll data came out and alleviated some of the immediate concerns. Payroll data was soft, but was in-line with estimates rather than sharply negative as some analysts began to fear after the weak data from earlier in the week.
The Institute for Supply Management (ISM) released their monthly purchasing manager’s index report, and the number came in at a surprisingly low 47.8, indicating a substantial manufacturing contraction. A score of 50 is flat, and it was as high as 60 a year ago.
This is the worst data point since the previous recession a decade ago:
The ISM non-manufacturing report came in below expectations as well, with a score of 52.6 compared to consensus expectations of about 55. While this is still an expansion, the non-manufacturing sector is in a clear slowdown. The number was over 60 this time last year.
The September jobs report showed 136,000 jobs created for the month. While labor participation remains mixed, the headline unemployment rate reached a new multi-decade low of just 3.5%.
As the chart below shows, retail (purple) and manufacturing (red) continue to be the sectors with weak jobs data, while health care, business, and service sectors continue to add jobs:
This jobs report has been described as a “Goldilocks” report because it’s not weak enough to spark imminent recession fears, but it’s soft enough that expectations for the Federal Reserve to add another interest rate cut at the end of the October remain high, and equity prices tend to jump at signs of rate cuts as long as recession concerns are not at the forefront.
Wage growth remained modest at 2.9% according to the report, which reduces inflation concerns and gives the Fed some justification to cut rates if they decide to do so later this month.
The S Fund Has Been Weak Lately
Although the S&P 500 (and the C Fund that tracks it) remains near all-time highs, the Dow Jones Completion index that the S Fund tracks has never gotten too close to regain its all-time highs set back in 2018:
Companies in the S Fund are more likely to be unprofitable than their larger C Fund counterparts, and generally don’t boost their earnings per share with stock buybacks, which generally makes them more sensitive to economic slowdowns.
See also, Is the I Fund Cheap Enough Yet?