Job Cuts, Motor Vehicle Sales; Both Fall

Job Cuts - Motor Vehicle Sales - Job Cuts Decline

The elevated Challenger Job-Cut average in Q1 described the labor market differently than the low jobless claims and the unemployment rate. 

As you can see from the chart below, even though total job cuts fell to 60,587 in March, the quarterly average was still much higher than the prior two. Bears love to flock to any report that supports their viewpoint. That’s why many followed jobless claims closely last fall and this winter. Bears lost another argument in their thesis with the latest April Job-Cut report.

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April job cuts fell to 40,023 which is the lowest reading since August 2018. Because Q1 cuts were so high, the year to date average is still 31% higher than last year. In this report, there were noted concerns about the job cuts in manufacturing and the auto sector. Weakness in manufacturing is consistent with the weak Markit and ISM PMIs. Specifically, the ISM report’s employment reading fell 5.1 points to 52.4.

Layoff announcements are a leading indicator for a decline in job creation, but we haven’t seen a decline in the BLS reading. The big boost in cuts in February coincided with weak job creation, but there hasn’t been weakness in the BLS reading since. I will discuss some of the shortcomings of the April BLS report in a future article, but headline job creation wasn’t part of the weakness.

Jobless Claims Stay Elevated

Jobless claims in the week of April 27th were elevated even though they stayed the same as the prior week. Some economists as well myself believed jobless claims were high in the prior week because of Easter. Jobless claims are seasonally adjusted. But that adjustment has a tough time dealing with Easter which has a different date each year. 

This explains why economists expected a 15,000 drop to 215,000. The 230,000 claims were above the high end of the estimate range which was 220,000.

Personally, I still think claims are higher than what they would be without the Easter holiday. That’s because unadjusted claims in the week of April 27th fell from 212,000 to 204,000. That means they fell about 8,000 more than adjusted claims. In the previous week, they increased 16,000 which was 21,000 less of an increase than adjusted claims showed. 

These two elevated adjusted claims reports had no impact on the BLS headline job creation reading and it showed. The 4 week average of initial claims increased modestly to 212,500 from 206,000. Continuing claims increased 17,000 in the week of April 20th. The 4-week average fell 13,750 to 1.674 million.

Solid ADP Report

Since the ADP report was accurate in predicting the BLS reading this month, it’s worth reviewing what it showed, even though the BLS report is already out. ADP report showed there were 275,000 jobs created which beat estimates for 180,000. It beat the high end of the estimate range which was 220,000. The prior month’s reading was pushed up from 129,000 to 151,000.

In the March report, many complained about the lack of job creation from small firms. There were 6,000 jobs added by small firms and 9,000 lost by very small firms. April report was much different as there were 77,000 jobs created by small businesses of which 32,000 were created by very small businesses with 1-19 employees. 

It’s wrong to worry about a segment of this report just because it’s weak for one month, even if that segment measures the all-important small businesses.

There were 145,000 jobs created by midsized firms and 53,000 by large firms with 500 or more employees. Service providing firms added 223,000 jobs and goods-producing firms added 52,000 jobs. As with the BLS report, professional & business and education and healthcare were the biggest job-creating industries as they added 59,000 and 54,000 jobs respectively.

Motor Vehicle Sales Miss Estimates

At the beginning of the year, I expected motor vehicle sales to be weak in 2019. April report supports that narrative as there were 16.4 million motor vehicles sold which fell from 17.5 million in March and missed estimates for 17 million. The low end of the estimate range was 16.9 million. 

In the May press conference, Powell mentioned auto sales as a positive. That changed with this report. This report is similar to the weak first two months of the year and is much below the mid-17 million pace seen in Q4. Domestic vehicle sales were 12.7 million which missed estimates for 13.2 million and fell from 13.6 million in March. That was below the low end of the estimate range which was 13.1 million.

As you can see in the chart below, average monthly light vehicle sales were down 2.2% yearly. Such a decline is usually recessionary. 

The decline is worse than the one in the 2001 recession. There is something to be said about the decline in teenage driving. This upcoming generation has a lower percentage of teens with licenses as more young people are going to school rather than getting jobs. That trend might lower sales this cycle, however, it’s not responsible for the decline in April versus March.

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More Productivity & Less Costs

Q1 productivity and costs report was great for employers, but not so much for workers. Productivity growth was 3.6% quarter over quarter which was up from 1.3% in Q4. It destroyed estimates for 1.9% and beat the high end of the range which was 3%. 

Unit labor costs were down 0.9% quarterly which was down from 2.5% growth and below the consensus for 1.8%. It missed the low end of the range which was -0.5%. Hours worked increased 0.5% while output increased 4.1%. That’s great for profit margins and bad for wage growth. It increases inequality. 

Adjusted for inflation, compensation was up 1.7% which is down from 2.3% growth in Q4. Productivity growth has been low this cycle. It’s great to see an uptick in growth, but it won’t be heralded because it didn’t lead to accelerated real compensation growth.