The August Employment Report Jinx Continues
To put it nicely, the government's employment data for August was squirrelly, reports Morningstar's Bob Johnson.
I think the market's mood this week was best summed up by my colleague on the Industrials Team, Adam Fleck. He said that this was really his favorite type of market. Good news is good news and bad news is good news, too. Good news is positive for the obvious reasons. Bad news means a higher probability that the Fed and other central banks are likely to take further measures to lower interest rates. This is especially true when the good news isn't off-the-charts good, and the bad news isn't a train wreck.
This week, the European Central Bank took steps that loosened monetary policy and China rolled out new infrastructure stimulus measures as economic news in both areas continued to show signs of slowing. I suspect that the Fed may follow suit at its meeting next week, following a poor manufacturing purchasing managers' report and a softer-than-expected employment report for August. (Though I don't think the employment was a disaster.)
However, a lot of the economic news this week was positive. The ADP payroll report showed a meaningful increase, the Challenger, Gray layoff report hit a 20-month low, and the ISM purchasing managers' report on services showed a surprise increase. Even the weekly data looked great, with the weekly shopping center report showing 3.7% year-over-year growth and initial unemployment claims falling again, approaching a recovery low.
The combined data seem to suggest that employers are hanging on to employees for dear life but not adding anybody new unless absolutely necessary. Meanwhile, strong auto sales and continued improvements in the housing market seem to suggest that consumers are continuing to increase spending at a slow but steady pace. And some of that spending is on big-ticket items and not just tchotchkes.
The August Employment Report Jinx Continues
Even after great employment news from other sources (ADP, Challenger, Gray, and initial unemployment claims) the official August report came up short, just as it did a year ago. Admittedly, the report showed that employment is far from booming. Previous months' job growth was revised downward and hours worked and average hourly wages showed no month-to-month growth. However, the year-over-year data, on a three-month moving average basis, continued to show overall employment grow at 1.8% for the third month in a row. Good, not great.
To put it nicely, the monthly data was squirrelly. A recent report from The Wall Street Journal notes the same phenomenon. Not meaning to make excuses, but the report noted that August job growth missed expectations in a whopping 21 of the last 28 years.
Overall employment growth for August was just 96,000 compared with 163,000 a month ago. However, at a time when new and existing home sales were up, construction employment didn't grow at all, according to this report. That makes no sense to me. Then, employment at building material and garden centers fell by almost 10,000 people, not a highly likely event given a better construction market. Then there was a decline in auto employment due to a shift in summer shutdowns offset by a return of striking utility workers in the Northeast.
Back-to-School Students or Labor Force Dropouts?
A separate part of the report showed that an unusually large number of employees, 368,000, left the work force (causing the unemployment report rate to drop from 8.3% to 8.1%). While many economists are characterizing these as labor force dropouts, I beg to differ. I think part of this disappearing act was due to students returning to school from their summer jobs. Typically, when students head back to school, these seasonal workers aren't replaced. Seasonal adjustment factors are supposed to capture this, but a lot of schools and universities are shifting the start of their school years earlier in August. An outright decline in temporary workers, a category heavily populated by students, supports my thesis. Also, some of the high dropout rate may have come from more employees quitting (or they stopped looking for work) to go back to school given that the current economic prospects weren't great anyway.
Auto Sales Accelerate Yet Again
Auto sales, one of the most important linchpins of the recovery, accelerated in August to 14.52 million units, the best performance since the cash-for-clunkers promotion in 2009. Year-over-year sales growth of more than 20% was inflated by a strong recovery from Japanese nameplates that suffered supply shortages last August because of the tsunami.
Still, the Detroit Big Three all reported year-over-year gains of more than 10%. Pent-up demand and low cost (and now available financing) are all responsible for the sales improvement. Pickup trucks also contributed to the strong activity levels in August. All of the Big Three reported double-digit gain in pickup trucks, with the Ford (F) F150 leading the way with a 19% gain. Since a lot of pickups are purchased by small businesses, it appears that the all-important small-business sector is feeling increasingly confident. Pickup sales also correlate with new home construction, so this metric reinforces some of the other positive homebuilding data that we have seen.
Manufacturing Data Slips
Though I am not a fan of the ISM purchasing managers' report for calling production tops, the report for August was still a disappointment. The overall index slipped from 49.8 in July to 49.6 in August. Perhaps the most bothersome portion of the report was that the new orders component slipped from 48.0 to 47.1 and from 60.1 in May. Orders are one of the more forward-looking categories of the PMI, because orders typically turn into production and eventually shipments in the month ahead. The report also suggested that inventory levels were also increasing, which is not particularly helpful with new orders falling. Prices also jumped dramatically with 54% of respondents indicating that they were paying higher prices, versus just 38% a month ago. Given my fear that inflation is the number-one reason that recoveries falter, this was the worst news in the report.
One bit of positive news in the report was that the employment index remained above 50 and was little changed from the previous month. The fact that manufacturers are still hiring would seem to indicate that they view the current slowing as temporary. The bright spot in the report was that while the overall index was below 50, eight of the 18 industries surveyed were still in growth mode with readings above 50 and two more were flat. Furthermore, some of the industries that saw slowing don't seem terribly consistent with the other data. Given improving existing home sales, housing starts, and sharply improved retail sales of furniture, it seems odd that the PMI for both the furniture and appliances categories was down and below 50. Also, robust auto sales noted above and increased production at Boeing (BA) don't seem to square with a below 50 reading for the transportation sector, either.
At least one industry with a shrinking PMI makes sense, namely computers and electronics. That industry is suffering from soft computer sales as customers await Microsoft's (MSFT) new operating system. Poor television sales and expected announcements out of Apple (AAPL) aren't helping either as consumers sit on their wallets awaiting the new products. Those situations should begin to reverse this fall. Machinery was weak, too, probably because of weak overseas demand and slumping commodity demand.
Things could be worse for manufacturing as they are in Europe. Markit PMI showed the European indicator slipped to 46.3 in August, lower than an earlier flash reading and below July's 46.5 reading. Even the heretofore strong results in Germany began to give way to weakness with the German PMI slipping to 47. I surmise that most of that weakening is due to softer orders from China, an important German customer.
Things didn't look at lot better in China, either. The HSBC purchasing manager survey slipped to 47 in August, its lowest level since 2009. Meanwhile, the normally rosier government data showed a reading of 49.2, its first time below 50 since November 2011.
Services Outperform Manufacturing, Again
Interestingly, the less closely followed ISM Report on Non-Manufacturers (Service Industries) painted a more bullish picture than the Manufacturing Report. The services sector indicator moved from a relatively bullish 52.6 to an even more bullish 53.7. The services sector is a much larger part of the economy than manufacturing but generally grows more slowly, even in boom times. New orders remained well above 50 and the employment sector managed a small increase.
Fed Announcement Likely to Dwarf Economic Data Next Week
Next brings a lot of economic reports but those will certainly be dwarfed by whatever action that the Federal Reserve decides to take at its meeting ending on Thursday. With this week's disappointing employment report and China and Europe already taking concrete actions, it seems highly likely the Fed will take steps next week to ease monetary policy. With the markets already anticipating more easing for some time, it seems that the actual announcement will prove to be anticlimactic. Nevertheless, those actions will overshadow all of the other economic announcements due next week.
Inflation Likely to Spike: Blip or Trend
I will be watching the report on consumer prices, which are due on Friday, the most closely. Expectations are for a pretty nasty report, with a consensus estimate of 0.7% inflation (8.4% annualized) for the Consumer Price Index. Higher food and gasoline prices will be the likely causes. What will be more interesting is what happens to other price categories. The U.S. has seen four months without any inflation, so a one-month backup should not upset the apple cart. However, I won't be thrilled if the price increases are broad based. The good news is that even with meaningful price increases for the month of August, the year-over-year increase in the CPI is likely to be less than 2%, compared with almost 4% a year earlier.
Is Optimism on Trade Misplaced?
The trade deficit showed a surprisingly large increase in June as the deficit decreased to $42.9 billion with a surprise increase in exports and a large decrease in imports. Economists are expecting more of the same good news in July with a consensus forecast of $43.5 billion. That seems overly optimistic to me given the slowness in Europe and China, which eventually has to depress exports. Oil import prices could be a negative, too. The trade deficit was a net positive to the GDP calculation in the first half but I doubt that the good news will continue into the second half of 2012.
Will Strong Auto Sales Depress Other Sales Categories?
Given strong same-store sales data from earlier this month, analysts are anticipating another very good comprehensive retail sales report on Friday with expectations of 0.7% growth. Strong auto sales (the best of the year in August) also support that optimism. Powerful employment gains in the restaurant sector reported this week should also mean that restaurant sales in August were relatively robust. That said, strong durable good sales (for example, autos) usually depress sales in other categories. And the buyers' strike on consumer electronics should continue through August with the new products from Apple and Microsoft not due until September and October, respectively.
Industrial Production Could Be Better Than the PMI Data Suggests
Though not an economic mover at this stage of the recovery, analysts are anticipating the second month in a row of decent industrial production growth (0.6% and now 0.3%). Those numbers are better than I would have guessed given a string of rather lethargic purchasing manager and new order reports. I suppose strong auto sales (and therefore production) are at least partially behind the optimism along Boeing's continued production ramp-up.
Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.