Job Market Will Get Back to Work
There are several clear reasons why employment should get better from here on out.
Investing Specialists
Economic stats for the week were mixed. Manufacturing, autos, and retail spending data all looked surprisingly robust in December. However, Friday's disappointing employment data left egg yolks streaming down my face. Instead of the 10,000 or so job gains that I expected, the economy actually lost 85,000 jobs!
My miss is another important reminder that projecting (and relying on) monthly data is a very dangerous game. Instead, we should all focus more on the fact that the economy has gone from losing jobs at a pace of well over 700,000 a month early in 2009, to infinitesimal job growth in November, to a small loss in December. I continue to believe that we're on the cusp of showing employment growth sometime very early in 2010.
Remember, though, that job growth is still a lagging indicator. Stronger-than-expected holiday sales, auto sales, and manufacturing orders are far more important for the months ahead than this week's modestly disappointing jobs report. I suppose the one bright side of the weak employment report is that it will put a halt to interest rate increases and commodity price increases, which were concerns of mine. However, I think the respite won't be long.
Productivity Looking Good
It is very intriguing that employment for the entire third quarter will be down again at the same time that most economists are looking for GDP growth of 3%-4%. More output with fewer workers should mean good productivity growth once again in the fourth quarter. That should help the U.S. economy's competitiveness as well as fourth-quarter corporate earnings, due out over the next month.
Employment Data Disappoints, but No Disaster
This week's employment report was disappointing, but not catastrophic. After five months of improvement, the economy lost 85,000 jobs in December (vs. 740,000 at the peak). This compares to a revised job gains figure of 4,000 for November. I had hoped we might get to a net jobs gain figure for some month in 2009, I just never suspected it would come from a revision.
Construction jobs and government jobs were the two big culprits in this month's negative jobs report, while most other groups dragged along at the same anemic pace as during the past several months. My guess is warm weather in November kept construction going a little longer than usual, while a cold December smacked the industry back down with renewed job losses. Later-than-usual holiday hiring probably helped retail employment during November (and hurt October) more than it should have, while problems at the U.S. Post Office hurt government employment statistics hard, too.
On the positive side, the financial services industry showed job growth for the first time during this recovery, joining the health care, education, and professional services sectors in outright growth mode. The employment services industry--a great leading indicator--grew by 46,000 jobs in December. Employers sometimes seek temp workers first (or make the temps permanent) before hiring new permanent workers.
Job Situation Should Get Better
I believe there are clear reasons why employment should get better from here on out, including indicators from the temporary help industry, better initial unemployment claims, corporate budget cycles, and the lifting of hiring freezes. Our employment analyst, Vishnu Lekraj, tells me there are other signs from his temporary help companies that job growth might be around the corner. One of his companies reported that the gap between what temp services firms pay their workers and what they are able to charge their end customers has begun to show improvement. This typically happens just before job growth restarts.
Initial unemployment claims have were basically flat this week at 434,000 (down from 674,000 at peak and compared with nonrecession numbers of about 330,000). This follows two weeks of relatively dramatic improvement. It will be interesting to see what happens next week when we clear the holiday-induced issues. The upcoming week is typically the highest layoff week of the year with no real close competitor (government statisticians try to capture this in their seasonal adjustment factors). The recent weeks of improvement came too late to positively affect December's monthly employment report.
I believe that corporate hiring cycles did manage to hurt employment reports in the fourth quarter, as human resources departments that had year-end headcount goals were finally forced into action during the last couple of months of the year. Prior to year end, there was always the hope that natural attrition might cure the problem. At the same time, new hiring is often tied to calendar-year budgets. New people could not be brought on board until January, even though there might have been a demonstrated need in November or December. I feared recession-related freezes could have amplified that problem. In January, I believe the economy has the potential for these factors to reverse themselves. Further into the year, more spending on residential construction, continued improvement in finance, an improved auto industry, and export sales should all provide further improvement in hiring.
Outside of Employment, The Economy Is Looking Up--Especially Manufacturing
This week's ISM purchasing manager's index improved to 55.9 from 52.6--the highest level yet of this recovery. A sustained index reading at this level is consistent with 4%-5% GDP growth. If it can be sustained, that number is considerably greater than the consensus GDP forecast for 2010.
The new orders component of this multicomponent index jumped to 65.5 from 60.3. This is significant. New orders provide fodder for more production and more employment several months down the road. The production subcomponent was also strong at 61.3, up from the mid-50s the prior month. This should be helpful in the very short run to both GDP and employment.
Customer inventories hit a record low since the ISM began measuring them in 1997, but there's a good news/bad news element to this. The bad news is that businesses still lacks confidence in the recovery because they are refusing to stock more goods. The good news is that, on the whole, customers haven't begun restocking their inventories. Low inventories that must be restocked will provide additional impetus to the economy in the months ahead.
Auto Sector Perks Up
As I suspected in last week's column, auto sales for December were better than anyone dreamed. According to Federal Reserve data, on a seasonally adjusted annual rate basis, December car and light truck sales were 11.2 million units, well above the 10.9 million consensus and better than every month of the year except August, which was inflated by the Cash for Clunkers program. I use Federal Reserve data in my analysis, but some industry sources are using even higher numbers, suggesting room for revisions over the next couple of months. While part of the success reflects some incentives, I believe that car sales are an important leading indicator of consumer confidence and consumer spending. Cars are big-ticket items, and this demonstrated willingness to spend is probably some of the best news we could get.
December Individual Retail Store Sales a Pleasant Surprise
Last week I begrudgingly reported some credit card usage data to surmise that the holiday season was a little better than anyone had anticipated, with 3.6% growth from November through Christmas Eve compared to the prior year. Going into the selling season, expectations were for no growth, plus or minus 1%. I say this begrudgingly because there were some issues regarding the inclusion of online sales and some day-count issues that made comparisons a little tricky.
News from individual store chains compiled by Reuters showed December sales growth of 2.9%, backing up last week's strong report. The improvement was widespread, with three-fourths of all retailers posting results that exceeded expectations.
Many retailers took the opportunity to raise their quarterly earnings expectations. Value players like TJX (TJX) and Ross Stores (ROST) remained absolutely on fire in December, exceeding 10% growth. But this month, luxury players like Nordstrom (JWN) and Saks also joined the parade, with year-over-year growth approaching 10%.
Bread-and-butter retailers like Kohl's (KSS) and Target (TGT) both beat expectations by large margins. Even teen retailers that looked weak in recent months were looking better in December. The electronics category also looked good for the entire month, with many after-Christmas gift-card redemptions going toward electronics. Best Buy (BBY) doesn't report monthly sales, but the industry scuttlebutt is hinting at growth in the high single digits.
I know a lot of analysts are knocking the strong retail numbers as a result of easy comparisons against a difficult 2008. However, I note that the economy deteriorated a lot after last year's holiday season. To get back to last year's holiday numbers was a harder goal than many realize, especially in light of the almost 6% GDP decline in the first quarter of 2009. And for those "can't get better without more jobs" doubting Thomases out there, I note that last year's unemployment rate for December was 7.4%. This year we were at 10.0% and holiday spending was up, no matter how you cut it.
Kim Picciola, our senior retail analyst, did warn me about one downside to the relatively strong holiday season. She mentioned that J.C. Penney indicated January sales could be a touch light because inventories have been drawn down so low that there isn't much to sell in January. The upside to that comment is they won't need margin-busting clearance sales in January, either.
Pending Home Sales a Downer, but There Are Some Silver Linings
Pending home sales for November were down 16% in November as the potential for the expiration of the homebuyers credit boosted demand substantially in September and October. In November, sales dropped back. Congress extended the credit, so I expect to see some improvement in this metric in the months ahead.
The poor pending home sales number (pending sales are recognized when contracts are signed) will translate into poor existing home sales (which are recognized when the final sale closes) for another couple of months. The good news is that despite the recent decline in pending sales, we are still about 18% above the level of a year ago. Another silver lining is that existing home sales over the past several months have been incredibly robust on an annualized basis: existing home sales moved from a low of 4.5 million units early in 2009 to 6.0 million-6.5 million toward the end of the year. Those extra home sales will eventually translate into more furniture, appliances, and consumer goods over the next several months.
Comments from Lennar Bode Well for Housing Demand
It may appear that there's still a lot of inventory on the housing market (although down very substantially from the peak). However, it was next to impossible to determine how much of this inventory was well-situated, desirable inventory and how much was in terrible locations that may never sell. Therefore, it was particularly enlightening to see the following comments made by a Lennar (LEN) executive on the quarterly earnings call and reported by our housing analyst Eric Landry:
In most of our divisions, there have been--there has been a meaningful reduction in the incentives used in the sales process, and that's reflected itself in higher margins. For the company overall, incentives were $36,300, down from $42,200 last quarter, and $51,400 last year. And margins improved to 17.8% from 15.6% last quarter and 17% last year. I feel comfortable today saying that this is a trend and not an anomaly.
Inventories of new homes are significantly reduced. In most markets, new homes are being built to order, and for the segment of the market that wants a new home, there are limited immediate opportunities to choose from, and that's helping reduce incentives. We also heard from the field that while foreclosures continue to be a significant driver of absorption and pricing, the effect is actually declining as the bulk of foreclosure activity is either in inner city locations or the extreme outskirts of markets in which we operate. The better situated foreclosure homes are being absorbed in an orderly fashion, and the market is clearing the inventory overhang in many locations. The $8,000 tax credit that was thankfully extended by Congress is facilitating that clearing process and will help enable a return to normalcy when the credit expires in the spring.
We heard that a general sense of confidence has returned to the customer and that there is a tangible sense that with prices and interest rates low, now is the right time to purchase a home for future security. This sentiment is driving many new purchasers to the market and traffic is slowly improving. This reflected itself in our first year-over-year increase in new orders since our first quarter of 2006.
We also heard from our division presidents that the unemployment rate in most of their markets has stopped falling and is at least stabilizing and in some instances beginning to recover. This is perhaps the most important element in driving future confidence, as the threat of losing one's job has deterred many from the housing market for sometime now.
More Clues on Manufacturing, Inventories, and Prices Due Next Week
Next week brings industrial production numbers that should be very good based on the various order indexes and purchasing manager surveys already published for December. Production numbers have been trending positive since July, and I don't expect the trend to break this month. We should also see additional regional surveys for January that ought to give us an early read on the sustainability of these strong December numbers for the manufacturing economy. Prices have been a little stronger than I like to see for the past few months (although not so bad when removing food and energy). Friday will bring the Consumer Price index, which I believe will show a moderate growth rate for December. The trade balance is due earlier in the week, and the deficit is likely to expand more given higher energy prices and higher consumer spending levels, which typically drive imports up. The wild card here will be exactly how strong export sales will be after a few pretty good months.
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