Employment Report Dodges the Wrath of Sandy
Despite worries about Hurricane Sandy, employment data showed more of the same boring growth.
For a week with a fair amount of economic data, both good and bad, markets seemed remarkably tame. There was almost no news out of Europe or China to give the market much reason to move. And with earnings season done, there wasn't much news on the corporate front to move things along.
In a nutshell, the employment data showed more of the same boring growth, despite my worries about Hurricane Sandy. ISM manufacturing data looked surprisingly weak even as the same report for the services sector was unexpectedly strong. Auto sales were far better than projected, helped along by the need to replace cars ruined by Sandy. Home prices continued to rally, according to CoreLogic (CLGX), and construction spending managed another increase.
Cliff Settlement Scenarios
It doesn't appear much progress is being made on avoiding the fiscal cliff. I am growing more concerned that as each side digs in, we will get closer to that edge than I had feared. That's truly unfortunate because the cliff will continue to get front-page coverage, which just might finally scare consumers, who have thus far totally ignored the possibility. Let's all hope we get a relatively quick resolution.
What would such a settlement mean? First, some relief and clarity, but it would also likely mean some bad short-term news for the economy. It is highly probable that a settlement would involve at least some tax increases early in the year that would impede growth in the first half.
And what happens if Congress doesn't reach a settlement? Well, not the immediate Armageddon the fiscal cliff countdown clocks would seem to imply. It is highly unlikely that every tax increase and spending cut embedded in the current law will stand for all but the briefest of moments if we "go over" the cliff. The worst of the impacts can probably be put off with some sort of administrative action (the U.S. Treasury can decide not to put out new tax withholding tables, defense cuts can be saved for later in the year, and so on) damping some of the most severe and immediate effects of going over the cliff.
Employment Growth Better Than Expected, Storm Impact Appears Minimal
The employment report came in far better than expected, with job growth of 146,000 workers, which represents 147,000 private-sector jobs and a loss of 1,000 government jobs.
The Bureau of Labor Statistics went out of its way to report that it received a normal number of survey responses, and it saw almost no effect on its data collection process. However, until the state-by-state, city-by-city data is available later this month, the bureau didn't offer any thoughts on the impact of the storm.
Given that many of the trends in the November report looked similar to those of the last six months, it's hard to argue that the storm had much of an impact at all. On the other hand, there were surely shuttered businesses that had been wiped out by the storm. Plus, the data collection process likely missed new businesses that popped up to repair storm damage. Both those facts would argue that the report was even better than the 146,000 jobs reported by the government.
Job Growth Stuck in a Rut, Even With the Storm
Surprisingly, with some notable revisions, the job market looks almost eerily stable. Year-over-year, private-sector job growth has been stuck at 1.8% for six months in a row. Even the month-to-month data has been a lot less volatile than expected. Over the last 12 months, the U.S. economy has averaged 161,000 new jobs per month. At that rate, it will still take about another two years to gain back all the private-sector jobs lost in the recession.
Retail Hiring Knocks the Cover Off the Ball, For Now Anyway
The retail sector was a real standout, adding 52,000 jobs. I surmise a lot of that was related to longer opening hours on Thanksgiving and Black Friday, and it could easily turn around and hurt the report in December.
Most other services categories were very to-their-averages, with education and health looking just a little weak, notching smaller gains than in earlier months. Non-durable goods manufacturing saw a down month (durables were flat), and construction took another big hit, falling by 20,000. Not meaning to sound like a broken record, but with better private-sector construction figures and sharply improved housing starts, it is difficult to imagine how this number is going down. Even ADP came to the same conclusion with its employment report showing growth in construction jobs of 20,000 workers for the very same period that the government showed a decline. (In the past, ADP has often bragged that it surveys more construction companies than the government does.)
Hours Worked and Hourly Wages Come in Better Than Expectations, Potentially Aiding Income
While I liked the hours worked and wage data (flat and up 0.2% sequentially, respectively), I am not sure I really believe it. It is relatively easy to say that the timing of the employment survey was far enough away from the storm that workers were likely to have worked one day in the latest survey payroll period, even if they didn't work every day of the pay period. (You need to be paid for just one day in the pay period to be counted as employed). Therefore, one can see why the storm may not have affected the employment count. However, hours worked were flat in the November report, which is a lot harder to explain. You would think that at least some portion of hourly workers missed at least one or two days of work because of the storm. That should have made hours worked go down, perhaps meaningfully.
Auto Industry Bounces Back From Sandy
Motor vehicle sales sprang back sharply in November from October's Sandy-induced swoon. First, Sandy caused a dip from 14.9 million units in September to 14.2 million in October before the rebound to 15.5 million units in November. Averaging October and November together probably gives a truer picture of reality (14.9 million units averaged), which is basically the high-water mark for auto sales this recovery. With some flood-damaged vehicles still in need of replacement, auto sales just might remain above the 15-million mark again in December.
Auto sales were one of the biggest reasons for the extreme depths of the recession and, conversely, one of the biggest sources of economic recovery. However, that engine of growth has slowed a bit recently as production got a little ahead of sales late this summer. As manufacturers slowed production growth to match sales growth in August and September and even early October, a variety of economic data was negatively affected. The new November auto sales data, combined with an uptick in auto industry employment, seems to indicate the next move in auto production statistics is likely to be up. That's good news for the economy and fourth-quarter GDP growth.
Storm Effects Easing in Short-Term Data, Will Continue to Affect Monthly Data
A lot of the Sandy effects have drifted out of the shorter-term data. What's left behind is an economy showing slow but generally consistent growth. Unemployment claims data are now lower than when the storm hit, and shopping center data is now consistently registering its normal 2.5%-4.0% growth following a couple of weeks of growth around the 1% level. Unfortunately, a lot of the big, more closely watched government reports are likely to contain big storm impacts for at least another month or two.
Manufacturing and Construction Versus Services: Moving in Opposite Directions
As I alluded to in my analysis of the employment report, services are now strongly outperforming manufacturing and construction. In the case of the employment report, the much larger services sector saw decent growth while the goods-producing parts of the economy actually lost jobs. The purchasing managers' reports from the ISM showed the same divergence. The manufacturing index declined from October to November, and more firms saw contraction than growth, which was a disappointment and below consensus. On the other hand, the services index had a surprise bounce all the way to 54.7, shocking most analysts who had been looking for a decline.
With slow exports and a muddled auto industry, it is no surprise that the two reports diverged. I suspect that with the auto industry looking up, the ISM report on manufacturing will look better next month.
Interestingly, ISM has a new competitor in purchasing manager data collection: Markit, which also provides a lot of international data. Its report showed the opposite of the ISM report. Namely, Markit's U.S. PMI increased in value and was above 50. Only time will tell which is more correct.
Home Price Good News Continues
Early this week CoreLogic released its home price indexes for October, providing the earliest read on home prices of all the major indexes. On a year-over-year basis prices were up a stunning 6.2% for October, versus 5.4% for September and negative 3.2% a year ago. Even using a more conservative three-month average, prices were up 5.4% from a year ago. Furthermore, the improvement was broad-based, as 45 states showed year-over-year price improvement. Destruction of some homes in the New York/New Jersey area is also likely to help support higher rents and home prices in the months ahead.
Prices, Retail Sales, Trade Deficit All on the Docket for Next Week
Perhaps the best news of next week will come on Friday when the U.S. Labor Department is expected to announce that overall prices declined by 0.3% in November after a very modest 0.1% increase in October. The improvement will come largely as a result of falling energy prices. For September, there were some meaningful increases and decreases by category. I think this month there will be fewer of the big increases (insurance and airline tickets were just two of the really big movers last month). I will also be keeping a very close watch on food price increases, which can be particularly harmful to the economy. On a year-over-year basis I still suspect that inflation will be less than 2%.
Sandy and Falling Prices Will Muck Up the Retail Sales Report, but Autos May Save the Day
Sandy has already badly hurt a number of retail sales reports, so I am not going out on a long limb for this one. The consensus is that sales in the comprehensive report will increase 0.3%, driven almost entirely by a big jump in auto sales. Without autos, retail sales are expected to decline by the same 0.3% as foreshadowed by the same-store sales reports from late November.
Remember, these reports were hit strongly by Sandy, but teasing out the underlying trend is next to impossible. The weekly data has been acting better the last two or three weeks, so I am not terribly worried about the all-important consumer. This week's employment levels and hourly wages looked good, unemployment claims are back down again, and gasoline prices continue to fall, all of which should bode well for the consumer.
Falling Oil Prices Mean Another Benign Trade Report
Given that the bulk of the new Apple (AAPL) products has already reached peak shipments and that oil prices have fallen, there is a pretty broad consensus that the trade deficit will be remain relatively flat at $42 billion for October. This would be more good news for the fourth quarter and the GDP report. The November and maybe the December trade reports will be badly distorted by a strike at the Port of Los Angeles, which lasted more than a week. That could serve to artificially reduce the trade deficit in November.
Industrial Production Will Be Sluggish but Better Than Last Month
Projections are that industrial production will grow 0.1% in November after a Sandy- (and an auto industry-) induced slump in October that saw production reduced by 0.4%. An improving situation in the auto industry and a potentially smaller Sandy effect will help the November data. However, warm weather is likely to hurt the utility and mining industry components in the same report. Year-over-year production growth could be as low as 3%. At the moment, manufacturing is not a big source of economic growth.
Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.