Hi Ho, Hi Ho, It's Off to Work We Go
Friday's great numbers were not a one-time fluke, says Morningstar's Bob Johnson.
Investing Specialists
All this week's economic indicators pale in comparison to the stunning employment report on Friday. The economy lost just 11,000 jobs in November compared with a consensus estimate of 130,000 job losses. The losses are statistically insignificant when compared against the more than 131 million people employed. The numbers are also a considerable improvement from the 741,000 jobs lost in January 2009.
Just us important, the downward revisions in job losses for September and October were huge. A combined 159,000 jobs were added back to the count for these two months. Other parts of the report were just as positive, as hours worked and temporary workers, two leading indicators, also improved sharply. Overall hours worked jumped 0.2 hours to 33.2 hours in November, while manufacturing hours were even more impressive, improving from 40.1 to 40.4 hours. Manufacturing hours are now up an impressive one hour, or about 2.5%, since May. Hours worked is an important metric because employers generally increase the hours of current employees before they add new people to their payrolls.
On the temporary help front, 52,000 temporary workers were added in November and a total of 117,000 temporary workers have been added since July. Our employment services analyst, Vishnu Lekraj, has been telling me for months that this is one of his favorite early indicators. Employers tend to add temporary help well before they hire more permanent full-time staff.
Unemployment Rate Drops
Surprisingly, headline unemployment declined in November falling from 10.2% to 10.0%. The number of people actively looking for work was neither a positive nor a negative in this month's calculation. If the economy is in really tough shape, some workers will withdraw from the job market altogether, artificially depressing the jobless rate. As the economy continues to improve, people who had been forced out of a job and were previously too discouraged to even look for a job finally begin to actively look for work. This tends to inflate the unemployment rate even as GDP improves. It also means that even as employment growth occurs over the next several months, the unemployment rate could still tick up a bit.
Temporary Help and Health-Care Drive Improvement
Sector-wise, job losses were improved in every category except information services. The most dramatic improvements were in professional services, including temporary help, and health care, both of which gained jobs. Most other categories showed little change. Government employment was basically unchanged. Separating services from goods producers shows that the services sector gained 58,000 jobs while goods producing industries lost 69,000 jobs.
More Employment Gains to Come
All the year-end effects (seasonal adjustment factors are large, corporations must meet year-end head counts goals, holiday work weeks) make short-term forecasting difficult. However, I am confident the employment situation will continue to improve in 2010, as employment-freezes end and 2010 budget allocations for new employees become available and the general economy continues to improve. In addition, initial unemployment claims have shown strong improvement over the last two weeks. This data is not reflected in the November jobs report as the collection period for that data ended Nov. 13, 2009, well before the sharp improvements in initial unemployment were reported. Last week, initial claims dropped another 5,000 workers following the previous week's very sharp decline of 39,000.
Could all these gains be revised away? Revisions are always a hard call, and it is one of several reasons that I am not a huge fan of the jobs reports. However, the new data shows a pervasive trend of improvement.
Job Losses Slow Dramatically
Job Change (thousands)
- Jan: -741
- Feb: -681
- Mar: -652
- Apr: -519
- May: -303
- Jun: -463
- Jul: -304
- Aug: -154
- Sep: -139
- Oct: -111
- Nov: -11
Note: Monthly Job Gains in the Last Cycle Averaged 67,000 and Peaked at About 300,000
The original jobs data failed to show the stair-step improvement of the revised data. Frankly, the old data seemed a bit inconsistent with a lot of my alternate data sources, including initial claims and the ISM survey data on employment. So it seems the new data is more correct than the original data series. Also, employment data is calculated from surveying individuals instead of employers. This individual survey is generally considered to be less reliable, but over time the corporate data and the individual data tend to converge. For November, this alternate survey showed employment for November grew by more than 200,000 people compared to the 11,000 job losses reported by corporations. This bolsters my confidence that Friday's great numbers were not a one-time fluke.
Non-Jobs Data Better Than I Was Looking For
Turning to other data, manufacturing numbers for the week were mixed but better than I had anticipated. Real estate data was also better than I hoped. In addition, seasonally adjusted auto sales were up in November, a pleasant surprise. Individual retail sales numbers and Black Friday/Cyber Monday sales data were mixed. Nevertheless, I believe the numbers are consistent with a small increase in holiday sales versus a year ago. Some of those sales are likely to come at the end of the shopping season as consumers and retailers play a game of chicken to see who will give in first.
The most positive manufacturing news came at the end of the week as the Census Department reported new factory orders increased 0.6% during October versus an expectation that new orders would be flat. Since new orders are the fodder for more production and more employment, I am particularly glad to see the continued improvement. In fact, October marked the sixth month of improvement out of the last seven months. The report also indicated that inventories increased for the first time in many months. Higher inventories are an indicator that manufacturers believe that orders and shipments will improve in the coming months. Better inventory numbers combined with improved production will also potentially drive fourth-quarter GDP numbers higher.
However, the widely followed ISM Purchasing Manager's Survey for Manufacturers declined from 55.7 to 53.6. While the number did drop, I note that any reading above 50 means more businesses are seeing improvement than declines. In fact, correlations between the current PMI index and GDP growth are consistent with GDP growth of about 4%. As much as I hate to see the overall index down, it is not atypical for this time of the cycle, and the possibility of a decline was well known. I take solace in the new orders part of the index that jumped to 60.3 from 58.5 the prior month.
On the real estate side I couldn't say it any better than our housing analyst Eric Landry who offered these comments on this week's data:
Existing Home Sales Register Big Gain, but Probably Inflated Due to the Tax Credit: October existing home sales increased 10% from September levels, as buyers likely scrambled to get deals done in time for a tax credit they couldn't be sure would be extended. The credit did end up getting extended, however, so home sales may take a dip in the following months. Single-family sales grew slightly less than 10%, while condo sales were up by more than 13% from September. Total inventories, at 3 million units, remain a bit elevated, but significantly below peak levels of about 4.6 million in the summer of 2008. Inventories are now at about the same level as they stood in December 2006. At the current sales pace, months' supply of inventory stands at seven, which is just slightly above what most would consider equilibrium. Even so, we continue to hear reports of buyers not being satisfied with the selection they're currently seeing.
New Home Sales Show Surprising Strength after Two Down Months: New home sales of 430,000 units at a seasonally adjusted annual rate (SAAR) in October were up 6.2% from September and, importantly, up 5.1% from the year-ago period. The year-over-year increase was the first of its kind since November 2005, but was aided by an easy comparison. Nonetheless, these comparisons are easy from here on out, so investors should expect stable-to-rising year-over-year performance in this series for the next several months. Inventories of unsold new homes continue to reside at unsustainably low levels. At 239,000 empty units, new home inventories haven't been this low since 1971, a time when the United States had less than 2/3 the amount of households. In fact, the ratio of empty new homes to households, at 2.1 per 1,000 households, sits at about half the long-term average of 3.9, and well below prior bottoms, all of which troughed at between 2.8 and 3.0 empty new homes per 1,000 households. In summary, investors shouldn't expect the current meager level of residential building activity to last forever.
Retail Sales/Black Friday Data Inconclusive
Last week I indicated that consumer spending would be increasingly important in the months ahead. This week's data didn't provide any clear direction. Black Friday traffic in stores seemed to be up, but average tickets were down. Online sales in general were up strongly and ahead of expectations, but this is still a relatively small part of the retail market. In all channels, it appeared that consumers were spending mostly on basics selling at discounted prices. Cheap prices lured consumers in, but they weren't biting on non-discounted goods. Consumers and retailers are locked in an all-out war with some very heavy artillery. Consumers are wielding price comparison software on all their major purchases while retailers use tight inventory controls and buyer behavior data in an attempt to limit discounting. Personally, I think consumers may have the winning hand.
Retail Sales and Trade Balance on Tap
Next week is relatively quiet. The trade number will be interesting to watch as the dollar has been relatively weak. The number could look a little better than some anticipate as cash for clunkers imports drop sharply and oil imports begin to stabilize. Longer term, exports are one of the reasons I am optimistic on the economy for 2010.
The retail sales report has been an infuriatingly difficult number to predict this year, but I think the number will be surprisingly good given some of the weekly data I look at, as well as better auto sales. It will also be interesting to see if home goods and building material sales begin to show some life given better housing results over the last several months.
Unfortunately, life never moves up in one straight line, and we have had two really good weeks of data. It would be really nice to string three great weeks together, but I am not holding my breath, nor should you.
The big picture is that the ship has turned and the employment anchor has been lifted. Full speed ahead.
 | | | | |
See More Articles by Robert Johnson
| | | | |
Morningstar.com Ideas Week
Gear up for the new year with Morningstar analyst insights on the economy and state of the recovery; our top equity, fund, and ETF picks; critical portfolio-planning opportunities; how Washington reforms may shake out for your investments; our Ultimate Contrarian Moves for 2010; and much more. Click here to learn more.