Back-to-School, Back-to-Work Drive Positive Economic Surprises
The economic news was uniformly positive this week and even included some respectable news from the battered manufacturing sector.
The S&P gained over 1% this week on a series of positive economic surprises in the U.S. and a lack of negative news out of Europe and China, tempered by fears concerning the upcoming earnings season. Alcoa (AA) is expected to release earnings next Thursday. Third-quarter earnings for the S&P 500 are expected to be down 2% or 3% from a year ago, the first decline of the recovery.
The economic news was uniformly positive this week and even included some respectable news from the battered manufacturing sector. Home price gains continued in September (according to CoreLogic (CLGX)), the employment report was good (the details were even better than the headline numbers), and the auto industry had a surprisingly good month. Same-store retail sales were OK and generally in line with expectations, but were not as strong as most of the other reports this week. In general, economic activity seems to have picked up a little after a slow August. Consumers are continuing to spend, but businesses continue to hold spending reins tightly, perhaps too tightly, given a stronger consumer.
Business capital spending remains constrained. And while businesses aren't firing anyone, they aren't in much of a hiring mood, either. In fact, this month's employment report showed that businesses chose to pay current employees more and work them more hours, rather than take a chance and boost hiring.
Combining rising stock markets, increased home prices, more jobs, and a lower unemployment rate--it could be a good holiday season, indeed. No wonder a number of retailers have already announced more expansive holiday hiring, and the ICSC is projecting 4% or more growth in holiday spending.
Employment Report: Some Impressive Detail Below the Headlines
Though the headline job additions in September just barely matched consensus (114,000 jobs added), there was a lot to like in this month's employment report. Besides job growth, both the number of hours worked and the wage per hour went up after a couple of months of stagnation. Average hours ticked up by 0.1 to 34.5 hours while the average hourly wage jumped 0.3%.
The combination of job growth, more hours, and more dollars per hour should drive consumer income figures for September considerably higher than August levels. Those incomes should give consumers the wherewithal for increased spending over the upcoming holiday season. Furthermore, as I surmised last month, job counts for both July and August were revised substantially higher; July was revised up from 141,000 to 181,000 and August from 96,000 to 142,000. These are embarrassingly large revisions relative to the size of the original job growth figures. And these revisions are likely to produce meaningful increases in personal income and perhaps consumption growth for the months of July and August.
Falling Unemployment Rate a Pleasant Surprise
The unemployment rate dropped, falling to 7.8% from 8.1% the month before, and 9.0% just one year ago in September. The unemployment rate is not a very predictive indicator (it tends to be a follower), but having the rate fall below 8% could prove to be psychologically important to consumers. The fall in the unemployment rate was even more impressive considering a massive number of new job seekers entering the market in September (although I think a lot of the large increase in job seekers in September and decreases in August were related to students returning to the classroom earlier than usual).
As much as the month-to-month employment data has been volatile, the year-over-year statistics have flatlined at 1.8% growth, as shown in the table below:
Housing Employment Data Continues to Puzzle Economists
Since August 2011, housing starts have increased 28% from 585,000 units to 750,000 units. Meanwhile, employment in the residential construction category is up by just 3,000 jobs or about 1% in a similar time frame. I can no longer attribute the lag to nascent improvement in housing starts. Housing starts have been more than 700,000 units for every month of 2012.
I don't know if more construction workers are in the temporary working pool, more workers are getting paid under the table, or shifting seasonal factors are the root cause of nonexistent construction employment growth. Of course, the government could have just plan missed counting some of these folks, too. Whatever the cause of the reported slump, I am 90% sure that the housing workforce is being understated by at least several tens of thousands that may eventually turn up in annual revisions when payroll data points are examined and final payment information for unemployment insurance becomes available.
Health Care, Transportation, and Finance Lead the Way in September
While employment in almost every category showed growth, the improvement was minimal in most groups. Only the health-care, transportation, and finance categories were showing meaningful improvements. Meanwhile the manufacturing sector showed job losses of 16,000 people as sales of capital goods and exports continued to slow. However, various manufacturing indicators (including the ISM purchasing managers reports, PMI) have shown improvement, potentially making September the low point for manufacturing hiring this year.
In some good news, government jobs have now broken meaningfully out of their slump. After dropping almost half a million jobs from the beginning of the recession, government employment growth has now been in positive territory for three months in a row (the most recent set of positive employment report revisions were primarily government-related jobs). This month the government contributed about 10,000 jobs. Most of that improvement has been at the state level, where strong sales tax collections are finally beginning to refill state coffers.
Benchmark Revisions Mean That More Than 5 Million Jobs Have Been Regained This Recovery
At the end of September, the government announced that it would be revising job counts for most of 2011 based on final unemployment insurance records, as it does every year. The preliminary announcement of the revisions showed that an additional 453,000 private sector jobs were gained in this recovery versus initial reports. Of the 8.7 million private sector jobs lost in the recession, 5.2 million or about 60% have now been recovered. Interestingly, the massive service sector has recovered 98% of the jobs lost (and should get every one of them back by year-end 2012). However, the goods-producing sector (which includes construction) has recovered just 17% of the jobs lost, even after some hefty upward revisions.
Other Employment Indicators Flashing 'Go'
The ADP employment report, which is based on actual payroll checks that ADP prints, showed private sector employment growth of 162,000 in September, well ahead of the government report of 104,000 private-sector jobs added. ADP figures increased 156,000 in July and 189,000 in August for a three-month total of 507,000. During the same period, government-reported jobs grew a more sedate 364,000 jobs. While the two metrics often diverge, they usually tend to move together over time. This would seem to suggest better government-reported numbers for the months ahead.
Likewise, the employment sector reports in various purchasing managers' reports seem to be indicating a stronger employment market, too. Higher consumer confidence reports (which generally include an employment outlook) are also looking much better than the government employment figures would suggest. The Challenger Gray layoff report also hit its lowest level since early 2011, and initial unemployment rates are again flirting with recovery lows despite fearsome seasonal adjustment factors. These reports all seem to suggest that if anything, this month's decent official employment was a bit understated versus a lot of the other employment metrics.
Same-Store Retail Sales Lethargic as Consumers Pause Between Back-to-School and Holiday Shopping
Same-store retail sales, excluding drugstores (which continued to be battered by generic drug sales and issues between Walgreen (WAG) and Express Scripts (ESRX)), managed to grow at 3.9% in September 2011 compared with September 2012. This was at the top end of the predicted 3%-4% range but below levels experienced in both July and August. However, averaging August and September, sales growth looks about the same as July, and the average for the year to date. A couple of special factors, including the moving of Nordstrom's (JWN) anniversary sale date and a return to more normal weather, inflated August numbers a bit.
My conclusion is that retail sales continue to grow slowly and at a pace that isn't likely to set the world on fire. However, given booming auto sales in September (which often leave less money and time to purchase goods in other consumer sectors), I don't think economists can complain about consumer spending overall. Likewise, shipments of the new iPhone did not seem to detract from other purchases, as I had feared. The one negative from the report was that the news was far from uniform. The low-cost folks such TJX (TJX) and Ross (ROST) grew near 6% while Target (TGT) had a decent 2% growth rate. On the other hand, Kohl's (KSS) and a lot of the teen-oriented retailers registered same-store sales declines.
Auto Sector Shows Healthy Gains
The auto industry has been a leader of this economic recovery and continued to lead in September as sales set a high for the current recovery. I no longer have to make an exception for the 2010 Cash for Clunkers months, either. The only problem is that while I see auto sales growth continuing, it won't be as dramatic as the recent past. It's hard to believe, but we have moved from 9 million units sold during a dark moment of 2009 to almost 15 million units today (monthly numbers at a seasonally adjusted annual rate). Morningstar auto analyst David Whiston summed up this September's reports as follows:
Automakers reported September U.S. new light-vehicle sales on Tuesday that were better than most consensus expectations. We will almost certainly never change a fair value estimate based on one month's sales data, but it is encouraging to see our investment thesis of a recovering U.S. market playing out. The full availability of inventory for Toyota (TM) and Honda (HMC) customers also helps volumes as Toyota's sales increased 42% year over year and Honda's rose 31%. According to Automotive News, September sales increased 12.8% from September 2011 to nearly 1.2 million vehicles, and the seasonally adjusted annualized selling rate, or SAAR, was 14.9 million--its best level since March 2008. September's SAAR is the seventh time this year that the SAAR has been above 14 million units and 14.9 is the highest SAAR of 2012. We are especially encouraged to see this increase happen despite incentive spending being down 6.7% from September 2011 and down 1.2% from August, according to TrueCar.com. This decline in incentives suggests healthy natural demand in the marketplace and that there is no need for automakers to overproduce like the Detroit Three did before the recession and the establishment of their VEBA plans.
There was a pronounced shift to cars away from light trucks in September, especially in the first half of the month as gas prices began to decline in midmonth. Car sales increased 23% while light truck (crossovers, vans, SUVs, and pickup trucks) volume rose 4%. If the current trend of declining gas prices continues then we expect light trucks to bounce back in October. We continue to see many reasons to be positive about new vehicle sales as the fleet is nearly 11 years old, credit is available, many new models are just now reaching showrooms, and used vehicle prices are still very high relative to the years before the recession. However, headwinds that concern us are the uncertainty about consumer spending due to the election and the threat of another "fiscal cliff" standoff in Washington later this year and in early 2013.
Manufacturing Data Looked a Little Better, Lifting Market Spirits
The U.S. Purchasing Managers' report showed a surprise jump from 49.6 to 51.5, and this metric is now back in growth mode (more than half of respondents reporting growth). Strong auto sales, Boeing's (BA) continued ramp-up, and now improvement in homebuilding-related goods have all helped the U.S. manufacturing sector do better than almost every other world market.
By component, new orders jumped from 47.1 to 52.3 while the employment sub-index moved from 51.6 To 54.7, suggesting improving confidence at manufacturers. Some anecdotal evidence suggests that a lot of the improvement is coming in both the South and Southeastern parts of the country. This could explain why both the Philly Fed and Empire State and even Chicago regional reports have lost some of their predictive powers. Considering a lot of the auto industry is now based in the South, and that Boeing has a new 787 production facility in South Carolina, and a lot of lumber products come from the South, the relative strength in this region should not come as a big surprise.
Manufacturing news from the rest of the world is not faring quite as well as the U.S. The Eurozone PMI reading was 46.1, its 14th consecutive month that more firms experienced declines rather than expansion. The 46.1 reading was an improvement on the 44 reading reached back in July. The news out of China was a little better, but not by much. China's official reading moved from 49.2 in August to 49.8 in September, its second reading below 50 (that means more firms are seeing declines than gains). If nothing else, the China report seems to indicate that the rate of slowing is already declining.
Services Sector PMI Activity Dramatically Stronger Than Manufacturing
The ISM Non-Manufacturing Report showed an increase to 55.1 in September from 53.7 in August. One would have to look all the way back to March of this year to find a reading this high. Services are a far larger portion of the economy than manufacturing, but services are much less volatile. For better or worse, the services sectors are unlikely to show large 20% swings, either up or down, that we often see in manufacturing.
The all-important new orders component jumped from 53.7 to 57.7, boding well for the months ahead. The only real disappointment in the report was that the employment portion of the index fell from 53.8 to 51.1. To have the employment index slow that much, even as both orders and current activity increased, illustrates just how cautious businesses have become, even as consumers continue to spend as if nothing much is amiss.
Trade Report and Producer Prices on Deck
Next week is a quiet one for the economic calendar. The trade deficit comes on Thursday, and the consensus is for the metric to expand slightly from $42 billion to $44 billion as exports continue to slow and imports for the holiday season begin to kick in. As long as the metric doesn't swing above $50 billion, I am not particularly concerned, nor will it have much of an effect on GDP calculations.
The relative strength of U.S. exports in the face of slowing world economies remains a mystery. Perhaps the other shoe will finally fall with this month's report (for August), especially due to all the summer vacations and holidays. Apple (AAPL) iPhone-related imports will probably have their most pronounced effects on the import report in September as the phones actually became available.
On balance, tamer oil prices should mean that producer price growth will remain muted, perhaps as little as a 0.2% gain for September, about the same as in the previous month. Food price impacts are difficult to forecast, so I will be watching for the actual effects from the drought in the report for September.
Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.