Recruiter’s View

The new ISM report says everything is getting better. But hiring growth is slowing, and suppliers aren’t delivering as fast as before. What’s going on?

The ISM Report on Business for March, 2010 was released on Thursday, April 1.

They didn’t draw these conclusions, but I did.  Let’s take a walk through their report and see what we can learn. 

The Institute for Supply Management tells us that the overall economy grew for the eleventh straight month. That seems reasonable. The stock market and our economy cratered and then began a long climb back, starting in March of 2009.

Yep, about a year ago.

And the manufacturing sector grew for its eighth straight month. Measured by the PMI, manufacturing hasn’t grown this fast since 2004.

PUT IT IN CONTEXT
Again, it’s great news that manufacturing is coming on strong. However, when I read the tea leaves, I try to remember that any year-over-year numbers in 2010 are going to look spectacular. 2009 was that bad. And we’ll need a fabulous rate of growth just to get back in sight of the production levels we once had.

COMPANIES REMAIN CAUTIOUS
Although the ISM doesn’t discuss it, I think this report confirms that companies really don’t want to invest in the face of government inspired chaos.

I think it’s notable that for all this zippy growth, the growth of new hiring is actually slowing. I have described many times before why employers might hesitate to add staff. I have written about companies that work everybody half to death – including the company president – rather than add more people.

So, here, in the face of the fastest PMI growth since 2004, employment growth is slowing. Doesn’t that seem weird?

HIRING GROWTH SLOWS
There’s a choke point in the numbers, and it centers around hiring (or the lack of it.)

ISM tells us that New Orders are up. And Production is up. That’s great.

But Production isn’t up enough: Supplier Deliveries are slowing. “There are no industry reports of faster deliveries,” they say.

I can only see one reason for that: Those same suppliers aren’t hiring.

Suppliers don’t have to hire. They have pricing power: Prices are increasing faster.

There is demand. And ISM is now reporting shortages: “There is a serious shortage of basic electronic components.”

So, let’s take a look at raw materials: Hmmm. No shortage.

Prices are up, but no shortage.

Every commodity price is going up, except for Natural Gas. It is the only commodity that costs less.

But with all these higher prices, there are no shortages reported for any commodity. There’s plenty of everything to go around.

SUPPLIER BOTTLENECK DEVELOPING
So, let’s review: Demand is up. Production is up. There is no shortage of raw materials. Prices are rising. And yet, Supplier Deliveries are slowing.

In a normal market, I can’t imagine how that could happen. With a government out of control, I can totally understand.

With employers hesitating to hire, we have shortages developing. Stuff isn’t coming through the system fast enough. And prices are already going up.

INVENTORIES AS PROTECTION
Since Supplier Deliveries are slowing, the only rational defense is to let inventories build. (Which, by the way, starts new shortages.) There’s little downside, if prices are going to continue higher; and it’s easier to have more inventory on hand than it is to fight a tight supply chain.

Guess what? Inventories are climbing.

SHORTAGES AND HIGHER PRICES FROM UNCLE SAM TO YOU
To me, we have government inspired shortages brewing. Shortages will cause higher prices, and they will make life even tougher on the 9.7% of folks who still can’t get a job.

Government cannot continue to threaten employers. As long as jobs are withheld, while costs go up and supplies slowly tighten, pressure will grow to make big changes in Washington.

Why? Because people want things, and our government is getting in the way.

SMART MONEY SAYS DON’T WORRY
In the face of all this, the stock market continues to climb, now nearly reaching DOW 11,000. What does this say to me?

Big money believes politicians are cracking. People want jobs, companies want to do business, and the world wants to buy things.

The bet is, Washington D.C. won’t be able to disrupt these forces much longer.

My bet is, they’re right.