Something's Not Working in November Jobs Report

It wasn't a great week for world markets with most emerging markets down more than 1%, European equities about flat, and the S&P 500 up about 0.4%. Oil prices are still weighing heavily on commodity indexes, which were also down over 1% for the week. U.S. 10-year Treasury rates were modestly higher at 2.3%.

The end of the week was decidedly better than the first part, with a strong U.S. employment report wiping out some of the bigger weekly losses in equities and commodities. The U.S. is again assuming its position as an engine of world economic growth.

The jobs report did far better than expected with job gains of 321,000, a better month than at any time since 2012. However, I am not sure if that data reflects misplaced seasonal factors or newfound economic strength. Keep in mind that November has been one of the stronger employment growth months of the year, and seasonal factors may not have caught up with that phenomenon.

U.S. manufacturing data remained unusually strong even as other world manufacturing reports teetered between growth and decline. Auto sales also looked unusually strong, aided by an extra day of selling and a new emphasis on Black Friday sales. Still, the high level of auto sales combined with great restaurant sales seem to suggest that consumers are feeling better about their short- and intermediate-term situation.

Employment Report Good, but Not a Game-Changer
On the surface, the jobs report looked fantastic, with job growth of 321,000 for the month of November, the best result of calendar 2014 and the best report since 2012. The jobs number was well ahead of the 12-month average of 228,000, the consensus estimate of about 230,000, and our estimate of 255,000. Even better, that huge growth came despite an upward revision to the jobs figures that totaled 44,000 for September and October combined.

However, November was also a great month a year ago when 274,000 jobs were added. Indeed, November has generally been in the top half of the 12 months for job growth over the past four years. So maybe at least a portion of the high growth was due to overly aggressive seasonal factors.

These quirky seasonal adjustments, bad weather, and strikes have wreaked havoc on the month-to-month employment numbers. Month-to-month variance in jobs added has been particularly high lately. For 2014, monthly job growth has ranged from 84,000 to 321,000 jobs added, despite a relatively stable economy. Poor months for job growth have generally been followed by good ones and vice versa. The U.S. was overdue for a good report, with both September and October coming in well below estimates (at least as originally reported). Unfortunately, tough seasonal issues and the normal reversion-to-mean pattern suggest that either December or January job growth could dip below 200,000 yet again.

That's why we always prefer to look at the year-over-year data, averaged over three months, to get a truer picture of economic activity. There was some improvement here, too, but not nearly as drastic as the raw month-to-month growth for November.

Average non-farm employment growth on this annual basis was 2.0% for November, which includes the wayward government sector that is barely growing at all. (Excluding government, private-sector job growth is running at 2.3%) That 2% job growth is very consistent with the 2.3% GDP growth we are anticipating for 2014. Productivity gains generally mean that employment growth has to run below overall GDP growth. If anything, the current gap between employment growth and GDP growth is quite narrow, suggesting the employment growth could slow in the months ahead.

Huge Wage Growth in November Looks More Muted Year Over Year
Like the raw employment data, the hourly wage growth was unusually strong in November. Month-to-month wages grew 0.4%, which annualizes to almost 5%.

Don't I wish. The wage data is prone to large upward bumps, and then it doesn't do anything, and then it gets another big bump. The careless data observer is often fooled by these moves. Even The Wall Street Journal referred to no wage growth for several months in a recent blog post, which ignores the predictable pattern.

The year-over-year, hourly wage growth trend looks like someone laid down a ruler to come up with data instead of querying businesses. Check out the middle column below, which shows average wage growth--it just isn't moving off of its 2.0% base.

Hourly wage rates and employment are growing at relatively similar rates. Hours worked has barely changed and is not a factor in the total wage report. Notice that total wage growth (the far right column) remains above 4%, is currently above its 12-month average, and is the highest result of the past year. Still, it's about the same as last November, which suggests a holiday season not much different from a year ago. Wages are the ultimate fuel for consumption growth.

With inflation falling sharply recently, inflation-adjusted wage growth is looking quite good, too. However, while the inflation-adjusted wage data has been getting better since June, the year-over-year numbers are not as good as they were in the fall of 2013. Because of quirks in the timing of changes in gasoline and food prices, inflation was artificially low last fall. So on an inflation-adjusted basis, this holiday season might lag last year, though not by much.

Some Decent-Paying Sectors Show the Most Year-Over-Year Growth
This recovery has been widely criticized for producing a bunch of low-wage jobs. However, more recent data suggests that this may not be the case.

Over the past year temp workers, miners, the professional and business services category, and construction were the most rapidly growing sectors, as shown below. The growth rates for the top four categories ranged from 8.5% to 3.6% against overall job growth of just 2%.

Each of these categories pays well above the weekly average wage (which combines hours and wage rates). Out of 19 categories, these top four high-growth sectors all made it to the list of top seven payers. While three of the top four growers are relatively small, the professional and business services category is one of the very largest. In fact, the professional and business services category added 694,000 jobs year over year compared with 667,000 jobs, combined, for the much-maligned retail, restaurant, and hotel worker segments.

Auto Sales Show a Nice Rebound in November
Auto sales have been one of the real bright spots in this economic recovery. The U.S. has moved from a low of just over 9 million units sold (seasonally adjusted annual rate) in the depths of the recession to 17.1 million units in November 2014. That was considerably better than economists' forecasts for November of 16.7 million units. The 17.1 million rate is the second-best rate of both the year 2014 and the entire recovery.

The calendar was advantageous to results, with an extra selling day that included Dec. 1. Also, more Black Friday sales events probably helped the numbers along. Still, November had the best result all the way back to December 2001. And this time around, a higher portion of sales came from cars produced in the U.S. Also, in a trend I don't like to see, pickup sales and SUVs were among the real standout performers.

Overall, it looks like 2014 will be a very good year for the auto industry. If December sales merely match the sales level of a year ago, sales for the full year will be 16.4 million units, up about 5% from 15.6 million units a year ago. However, that growth rate is down from 13% and 7% for 2012 and 2013, respectively. Things are good, but slowing. Lower gas prices and new models do, however, have the potential of keeping 2015 sales growth levels very close to those of 2014.

ISM Data Suggests That Manufacturing Continues to Outperform
The ISM data from purchasing managers in the manufacturing industry surprised nearly everyone, showing almost no change between the 59.0 reading for October and the 58.7 reading for November. The October reading was viewed as an extreme outlier that was unlikely to be repeated. Well, the index came very close to a repeat performance.

Although this index hasn't done well predicting short-term squiggles, the strong and nearly continuous upward move in the reading closely parallels the sharp upward movement in year-over-year industrial production growth. It missed forecasting the small dip in production in October, but employment and hours-worked data suggest a nice bounce-back in production for December, consistent with the high ISM readings. I suspect manufacturing will continue to do relatively well, though I doubt that growth can accelerate much from here.

For the U.S., I prefer to use the ISM data that has a longer track record over the upstarts at Markit, which entirely missed the fall boom in manufacturing. Still, to have an apples-to-apples comparison to other economies, I do report Markit's flash data that comes in the week before the end of the month. I don't comment on the final version of the report to avoid confusion with the ISM data that comes out the same day.

I do think people tend to overuse both of these reports. They are both unbelievably good forecasters when the indexes make big swings, but small ticks up and down in narrow ranges tell us nothing.

Trade Deficit Unchanged, Now a Likely Detractor From Fourth-Quarter GDP Growth
The trade deficit for October remained virtually unchanged from September at $43 billion, despite high hopes for a big improvement. Falling oil exports because of a more competitive and slower-growing world market was the primary reason that the data failed to improve much. Cell phone imports did drop by a billion dollars, as widely expected, as the U.S. moved past the launch of the iPhone 6.

The relatively higher-than-expected trade deficit starts the third quarter on the wrong leg. Unless the deficit gets better quickly, trade is likely to be a detractor from the GDP calculation for the fourth quarter.

Overall, net exports have been a much smaller drain on GDP growth than in almost any other recovery. A good percentage, but not all of that improvement, is due to the U.S. energy production boom.

Despite the Negative GDP Impact, Trade Data Is Almost Too Good to Be True
Some of the individual monthly numbers still look funky to me. Even excluding oil, exports increased by $3.8 billion and imports decreased by $2.2 billion when adjusting for inflation between September and October. It's not supposed to work that way. The world economy is slowing and the U.S. economy is picking up at least a little steam. That should have limited exports while driving imports sharply higher. However, in dollars, exports increased by nearly double the rate of imports.

The pattern is even visible in year-over-year averaged data, with import growth flattening and export growth accelerating, adjusting for inflation and excluding oil.

I don't know if this is stemming from a seasonal issue, a delay in processing data from crowded ports, or newfound U.S. competitiveness. I had posited for the past two years that the slowing overseas growth wouldn't kill the U.S. recovery, but the recent data looks too good to be true, even to me.

CoreLogic Shows That National Home Prices Rose in October (written by Roland Czerniawski)
The CoreLogic Home Price Index increased a hefty 0.5% in October, lifting the year-over-year growth rate to 6.1%, from the 5.3% reported in the prior month. October’s increase breaks the 12-month-long pattern of decreasing year-over-year growth.

Despite that increase, we still believe that the growth of home prices is moderating, but because of still rapidly rising prices in some areas of Texas and California, the overall number tends to be a little elevated. Furthermore, based on its estimates, CoreLogic projects that prices also rose in November, which would further increase the year-over-year growth, whether you look at it on a three-month moving average or on a single-month basis. Nonetheless, prices are growing at nearly half the rate compared with the same time last year, and we view this as a favorable development.

Overall, home-price levels are still about 12.4% below the April 2006 peak, and about 13 states are at or very close to the previous prerecession high. CoreLogic economists predict that over half of the country will reach or surpass the previous market high sometime in mid-2015.

Retail Sales Are Likely to Be the Biggest News Next Week
Retail sales have been on a month-to-month yo-yo for most of 2014. The year-over-year growth rates, ex-autos and gas, have looked a lot more stable at around 4%. For the record, the consensus month-to-month increase is expected to be around 0.2% for November, down from 0.3% in October, which was quite strong. Autos should be a big contributor in November. Cold weather may have helped a few weather-sensitive categories, too. Therefore, I suspect that the consensus figures may prove to be a little light.

In other news, I expect the number of job openings to decline slightly, as a lot of job openings appear to be getting filled. I also expect to see a small pop in quits either in October's report (due next week) or probably no later than November's data. I will also be checking the NFIB's report on small-business sentiment for changes in small-business hard-to-fill openings and general hiring intentions to confirm this month's bullish national employment report.

I also expect data on the federal budget deficit to improve as tax collections continue to jump higher while expenses remain under tight control. Federal government employment is currently down year over year. Given inflation rates and interest rates, budget deficit forecasts for fiscal year 2015 may prove to be too high, yet again.