December 6, 2009 – “The Upside Surprise in the Employment Data”
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The Upside Surprise in the Employment Data
November payroll employment fell by only 11,000, following a revised 111,000 decline in payrolls in October, which had previously been reported as a drop of 190,000. And, the September employment decline was revised to 139,000 from 219,000. Our report of November 29th forecast a drop of 90,000 in November payrolls, while the market consensus expected a 116,000 drop in November payrolls. Needless to say, the payroll drop of only 11,000 was much better than expectations.
The story of the payroll count in the November data is mostly solid, and not a consequence of seasonal adjustment factors. The impact of the seasonal adjustment factors was actually to dampen November payrolls by 91,000. Taken together, the September and October payrolls were upwardly revised (to show smaller declines) by 159,000. These changes were not a function of any concurrent seasonal adjustment. In fact, the NSA, i.e., unadjusted data were actually revised upward by 183,000. Moreover, the length of the private sector workweek improved in November to 33.2 from the abysmal low of 33.0., and aggregate hours worked advanced 0.6% in November, the best monthly gain in this series since December 2006. One negative is that average hourly earnings (AHE) in November were up only 2.2% y/y. This was below October’s 2.4% y/y rise, and is the lowest y/y pace since August 2004.
There can be no debate as to the severity of the recession. Aggregate job losses since the December 2007 onset of the recession are nearly 7.2 million. And, the Bureau of Labor Statistics (BLS) preliminary benchmark revision suggests actual job losses have been 824,000 more severe than the reported numbers. That would bring aggregate job losses to 8.0 million. The depth of
the payroll decline in this cycle, particularly in cyclical industries, suggests a faster rebound than in 2001.
The growth in temporary help payrolls was 52,000 in November. October showed a revised 44,000 advance in temporary help. November was the 4th straight monthly increase in temporary work payrolls. This bodes well for payroll employment growth in the future. Growth in October and November payrolls has been pronounced in business and professional services. November 2009 manufacturing payrolls, however, were the lowest since 1941, but aggregate hours worked in manufacturing rose 0.4% in November. The November factory workweek increased to 40.4 hours in November vs. 40.1 hours in October.
The labor market is still very weak, especially as evidenced by the incidence of long-term unemployment, i.e., exceeding 26 weeks. The Household Survey shows the rate of unemployment falling from 10.2% in October to 10.0% in November. We believe the peak unemployment rate has yet to be reached, but we believe it will stop far short of our earlier expectation of 11.0%. Initial jobless claims are at the lowest level since the week ended September 6, 2008, and the pace of job losses is subsiding.
The Fed’s latest Beige Book characterized “eight of the 12 districts reporting some pickup in activity and the remaining four finding that conditions were little changed or mixed.” The overall Beige Book report seems to support the Fed stance of keeping the funds rate near zero through 2010. But, the latest employment data likely accelerate the Fed’s decision to move the funds rate higher. The Federal Open Market Committee meeting December 15th will include considerable debate on how and when the Fed should exit its extraordinary easing posture.
Light vehicle sales were stronger than expectations in November, increasing to 10.9 million units annualized, while manufacturing activity slipped in the November Institute for Supply Management (ISM) report, but to a still expanding 53.6 from 55.7 in October. November was the 4th successive month of expansion in this manufacturing metric. New orders increased in November m/m, as did export orders.
The non-manufacturing ISM report on Thursday was weaker than expected, slipping to 48.7 in November from 50.6 in October. New orders continued to expand at 55.1 in November, off slightly from 55.6 in October.
Construction spending was flat in October, per last Tuesday’s reading. Single family homebuilding and federal construction outlays were the areas of strength, while multi-family construction and state and local construction fell. Non-residential private sector (commercial) construction is the area with significant incremental weakness ahead.
Three other upside surprises last week merit mention. Tuesday’s October pending home sales increase of 3.7% was stronger than expected, and was the 9th monthly increase in succession. Monday’s jump in the Chicago Purchasing Managers Index to 56.1 in November from 54.2 in October was much stronger than consensus expectations for an actual decline. Friday’s 0.6% rise in October factory orders atop an upwardly revised 1.6% September gain, previously up 0.9%, beat expectations.
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Economic Indicators in the week ahead:
Monday, December 7 3:00p.m. October Consumer Credit
We see October Consumer Credit Outstanding (CCI) as having declined an incremental $10 billion, primarily in the revolving credit area, i.e. credit cards. Revolving credit has plummeted $86 billion over the preceding 12 months. The decline is both a function of reduced credit demand from continuing consumer deleveraging, and tightened credit supply from banks,
which have been increasing borrowing rates and cutting credit card limits, as they experience escalating charge-offs. CCI will have fallen roundly 5% y/y, the largest fall since a 6.1% y/y drop in June 1944. CCI dropped $14.8 billion in September. Market consensus expectations see a $9.7 billion decline in CCI in October.
Wednesday, Dec. 9 10:00a.m. Oct. Wholesale Inventories
Inventories at the wholesale level were likely pared 0.7% m/m, a bigger decline than the 0.5% expected by the consensus. Higher auto sales will be a factor, and the inventory to sales ratio will recede.
Thursday, December 10 8:30a.m October Trade Balance
Our trade deficit swelled 18% in September, widening to $36.5 billion. We feel our trade balance will narrow to $35.0 billion in September. Consensus expectations see the trade imbalance widening to $37.1 billion in October. Despite higher oil prices, we believe oil and related imports fell in October. We believe exports grew 1.2%.
Thursday, December 10 8:30a.m. Jobless Claims
Initial claims for the week ended December 5 likely rose to 475,000 in the post-Thanksgiving week, seasonally adjusted, from 457K the prior week. The consensus sees claims increasing to 470K. The four-week moving average of initial claims falls to 473K, the best since October ’08. Continuing claims will decline, as a mirror image of more people going on to the extended federal payments program.
Friday, Dec. 11 8:30a.m. November Import Price Index
A jump of 1.5% m/m took place in November, led by higher petroleum and metals prices. This would yield a 3.4% rise y/y rise in import prices, the first y/y advance since October 2008.
Friday, December 11 8:30a.m. November Retail Sales
We see a November rise of 0.9% m/m, also 0.9% excluding autos, following the 1.4% increase in October (0.2% excluding autos.) Increases in gasoline sales, new vehicle sales, and building materials sales contribute to our overall retail sales expectation of 0.9%, stronger than the 0.6% rise expected by the consensus.
Friday, Dec. 11 10:00a.m. October Business Inventories
We expect overall business inventories to fall 0.2% in October, in line with the consensus. Factory inventories grew 0.4% in October, the first advance in 14 months. Retail inventories likely were cut 0.3%. The overall business inventory-to-sales ratio likely fell in October to slightly below 1.3, from 1.32 the prior month.
Friday, Dec. 11 10:00a.m. Dec. Consumer Sentiment (P)
The preliminary December Reuters/University of Michigan Index of Consumer Sentiment rose, in our view, to 70.0 from 67.4 in November. Higher equity prices, a drop in the rate of unemployment in November, and a lessening in the growth of unemployment claims contribute to our higher than consensus (68.8) expectation rise in consumer sentiment. The final consumer sentiment measure will be reported on December 23rd.
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Jack W. Lavery
CEO & Chief Economist of Lavery Consulting Group, Senior Executive Fellow in Financial Economics at the University of Maine