Stocks were down today, largely in reaction to the release of the so-called ISM non-manufacturing report, which monitors activity in the service sector (primarily assesses banks, retailers and construction companies). The results showed the sharpest contraction since 2001.
Paul Krugman, who is not the bearish type, said the report indicates a recession is underway:
The ISM non-manufacturing report came in today…. the fact that it has fallen off a cliff should worry us.
But how bad is it? The latest report has an employment diffusion index of 43.9 (50 means no change, anything less than 50 means job contraction). Here’s the historical relationship between the index (horizontal axis) and the actual monthly change in employment, in thousands (vertical axis), data since July 1997. If this report is at all right, we’re in serious recession territory.
Add: As explained above, the horizontal axis is the ISM employment index, the vertical axis is the change in nonfarm employment over the following month. Fwiw, the best-fit relationship says that this month’s report portends a loss of 137,000 jobs next month. You don’t want to take that too seriously, but it’s appropriate to cry “eek”.