This Week's Evidence on Whether the Economic Recovery is Slowing

This week, the stock market faces some evidence on whether the economic recovery is slowing in the face of the upsurge in coronavirus infections.  Key data are expected to show little impact so far.  Consensus estimates an uptick in the July Mfg ISM and slower but still strong growth in Payrolls.  Near-consensus prints should be handled in stride by the market.  The risk, however, is for a downtick in the Mfg ISM.  But, it should not prompt much selling since it should remain above 50.  The risk is for a counter-consensus speedup in Payrolls.

Consensus looks for an increase in the Mfg ISM to 53.6 in July from 52.6 in June.  But, the Phil Fed Mfg Index and Markit Mfg PMI give conflicting evidence.  Both correctly predicted direction of Mfg ISM in 5 of 6 months this year.  (Phil Fed was correct in 8 of 12 months in 2019, Markit Mfg in 7.)  The Phil Fed Index suggests a small decline.  The Markit Mfg PMI suggests an increase.  But, the Markit Mfg PMI's increase to 51.3 in July from June's 49.8 could have been just catch-up to the 50+ Mfg ISM print in June.  Nevertheless, the level of the Mfg ISM has exceeded that of the Markit Mfg PMI in each of the past 4 months.  A decline in the Mfg ISM to no less than 51.4 would be consistent with both the Phil Fed and the latter Markit Mfg PMI evidence.

Consensus looks for a slowdown in July Payrolls to +2.260 Mn from +4.800 Mn in June.   The Continuing Claims data, however, point to a speedup in July job growth.  To be sure, much of the May-June jobs gains appear to have been from people who did not file for unemployment benefits.  If they pull back significantly, Payrolls could slow in contrast to the implication of Continuing Claims.  A new BLS survey shows a decline in people with jobs in July, even if last year's seasonals for Household Employment are applied.  But, this is a new survey and relatively small, so cannot be relied upon.

The reason why Continuing Claims suggest a strong Payroll print is that a large amount of re-hiring occurred in the early part of this interval between the June and July Payroll Survey Weeks.  Continuing Claims fell sharply during that period.  The resurgence of the virus appears to have resulted in layoffs late in the interval.  This means that the slowdown in job growth could be seen in August Payrolls rather than July's. 

Consensus looks for a decline in the Unemployment Rate to 10.3% in July from 11.1% in June.  But, a decline to under 10% cannot be ruled out.  A single-digit unemployment rate could be important for the Presidential election campaign.

It is probably too soon for the Presidential election to be a dominant influence on the stock market.  But, there could still be surprises that create at least volatility.  President Trump's threat to ban TikTok from the US is an example.  The market risk is that it could lead to retaliation by China.