Activity in the manufacturing sector expanded in May for the third consecutive month, according to the Institute for Supply Management (ISM), while the overall economy grew for the 84th consecutive month. The ISM manufacturing Purchasing Managers Index (PMI) historically has slumped to less than 50 just as the economy slides into recession. While this index grabs headlines, it's far from reliable. The manufacturing index has slipped well below 50 often without the economy slipping into recession. Manufacturing activity has come to be less influential in the U.S. economy's overall strength. A better indicator of overall economic strength has been designed by ISM because of the shift in importance of the non-manufacturing segment of the U.S. economy.
Because manufacturing only accounts for about 14% of gross domestic product, ISM's index of non-manufacturing orders is a better measure of growth in the pipeline in the U.S. economy. ISM began to track this index only in 2008, when it became evident that manufacturing activity was not a great indicator of growth in the overall U.S. economy. ISM designed the non-manufacturing index to be a better indicator of the U.S. economy, which has become much less reliant on the manufacturing sector for its growth.
Despite its short history, the ISM non-manufacturing is given credence because it uses the same calculation methodology as the widely-watched manufacturing index. A reading of less than 50 in the purchasing managers index for the non-manufacturing economy would indicate a recession was coming.
In May, the non-manufacturing PMI ticked lower, to 52.9 from 55.7. ISM, a trade organization funded by large corporations, estimated that the 52.9 reading in the non-manufacturing corresponded to a 1.6% annual growth rate in the U.S. economy.
Meanwhile, the unemployment rate declined by another three-tenths of 1% in May to settle at 4.7%, according to Friday's data release from the U.S. Bureau of Labor Statistics. That's the lowest rate of unemployment since the peak in employment during the last economic expansion in 2007.
While financial news reports often continue to describe the economic recovery as anemic and say that new job growth is disappointing, job growth has been stronger for longer than in a typical recovery. That's because the last downturn — The Great Recession of 2008 and 2009 — was deeper than is typical of the U.S. economy.
However, as the unemployment rate sinks further, new job formation cannot remain at current levels and companies will find it increasingly difficult to fill vacant slots. That could add some inflation pressure to the economy but would raise wages.
Average hourly earnings rose at a 2.5% annual rate in the year ended May 31, 2016. That was faster than the 2.1% five-year annual growth rate in wages. Wage stagnation is a fiction.
Meanwhile, new data released by the U. S. Bureau of Economic Analysis, rose by one-half of 1% in April. Disposable personal income is what's left of personal income after taxes.
Disposable personal income and spending have been in recovery for over five years — growing at slightly less than the pre-recession growth rate — following the sharp, recession-related correction of 2008.
Because personal spending accounts for 69% of GDP, its rate of change is a key driver for growth in U.S. Gross Domestic Product. Personal income drives spending.
During the 2008-09 recession, personal savings surged from the boom-time-spending pre-recession lows. Since recession-end, the savings rate has remained substantially higher than it was pre-crisis.
Another key driver of growth in the economy, the personal savings rate, declined in April, according to the BEA. However, the savings rate, at 5.4%, has recently been running higher than the last expansion.
The Standard & Poor's 500 index dropped a fractional amount Friday, losing 0.3%, to close at 2,099.13. Press reports blamed a "weak" jobs report. Despite an abundance of fairly positive economic news, stock prices were flat for the week.
This article was written by a veteran financial journalist using data compiled by Fritz Meyer, an independent economist. While these are sources we believe to be reliable, this information is not intended to be used as financial advice without consulting a professional about your personal situation. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss.