Labor Market Inches Towards Bottom Of Financial Crisis

Weak November ADP Report

Even if the 3^rd COVID-19 wave didn’t happen, we’d be seeing some slowing. The economy can’t grow at a double digit pace and create 1 million jobs per month indefinitely. Obviously, we did have a 3^rd wave which means there will be some impact this fall. 

We just don’t know how bad the slowdown will get. That’s compounded by the fact that we don’t know how bad the outbreak will get. We keep getting conflicting economic data points from October, butinvestors are likely more worried about November and December than the past.

Cases are still climbing which means the economy will get worse. It is more immune to weakness than in the spring because people and businesses have adapted to this new environment. However, we know the recovery will be a struggle in the next few months especially for those in the leisure and hospitality industry. 

ADP report has been too negative in this recovery, but it’s our best guess thus far on how the labor market did in October. And the ADP report showed private sector job creation of only 365,000 which missed estimates for 600,000 and fell from 753,000.

As a reference point, the BLS report is expected to show 650,000 private sector jobs added. There will be a rotation out of cyclical stocks into secular growth stocks if this report misses by as much as ADP did. Unemployment rate is expected to fall to 7.7% which is much better than most people thought it would be at back in the spring. Some investors continue to be bullish on the recovery in the intermediate term. 

As you can see from the chart below, as of October ADP payrolls are 7.78% off their record high. Financial crisis recession troughed at -7.4% which means we are very close to a relatively normal recession. Difference here is when the economy reopens, we will get another jump in job creation from the most affected industries. It won’t take as long to recover the losses as last expansion did.

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Within the report, small business job creation was 114,000, mid-sized job creation was 135,000, and large job creation was 116,000. There’s not much to say about that because it is a very even mix. Goods producing firms only added 17,000 jobs. 

Construction only added 7,000 jobs which is too low, meaning the BLS report will be better. And the 7,000 jobs added in manufacturing will be bested by the BLS report.

There were 348,000 jobs added in the service sector. This was driven by leisure and hospitality which added 125,000 jobs. The industry is still hurting, but it lost the most jobs in the recession so it keeps adding the most back. Education and healthcare added 79,000 jobs. 

Remember, in September there were fewer education jobs added than expected because kids went back to school later than usual. There will be a big burst in this category in the BLS report. These results are manipulated by seasonal adjustments because COVID-19 transformed the normal seasonality of the economy.

Slight Decline In Services PMI

For those who were wondering where the COVID-19 related weakness was in the manufacturing ISM report, it’s here in the services report. By no means was this a bad report, but it did fall from September. PMI fell from 57.8 to 56.6 which missed estimates for 57.6. It missed the lowest estimate which was 57. We know the virus hurts the service sector more than manufacturing.

For those looking for clues about the monthly labor report, the employment reading fell 1.7 points to 50.1. That’s fairly low for the amount of job creation we are seeing. As you can see from the chart below, this index was below 50 when the economy was creating millions of jobs. There will be fewer jobs added in October than September, but job creation will be better than most months in the previous expansion despite what this index shows.

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Business activity index fell from 63 to 61.2 and the new orders index fell 2.7 points to 58.8. just like the manufacturing report, the prices index spiked. It was up from 4.9 points to 63. The only commodities that dropped in price were dairy, personal protective equipment, and software. This report is consistent with 2.7% growth which seems about right. According to the Atlanta Fed Nowcast, GDP growth will be 3.2%.

With the quarter almost halfway over, it’s nearly safe to say America will dominate Europe because there are fewer shutdowns here. 

Within this report, an accommodation and food services firm stated, “Business has improved, but greatly reliant on COVID-19-related restrictions. Supplier’s inventories and lead times are longer and spotty with outages due to keeping lead times lean as a cash flow measure, but putting consistent supply at risk.” Restaurants will be in deep trouble in the next 3 months. It’s too cold to eat outside in most of the country.

Markit PMI Looks Better

Markit Services PMI was almost the same as the ISM PMI, but it did much better on a rate of change basis. It increased from 54.6 to 56.9. Business expectations were the best since April 2018. Confidence improved because of hopes for looser virus restrictions within the next year and hopes for a stimulus. 

This makes it look like the recovery hasn’t skipped a beat. Data points mentioned in this article support the point made about how October results have been mixed.

According to the Chief Business Economist at Markit, “Growth of business activity accelerated markedly in October, indicating that the underlying health of the US economy continued to recover at the start of the fourth quarter.” This report showed business activity increased at the fastest pace since April 2015. Markit PMI is less volatile than the ISM PMI which means a PMI at this level is amazing for Markit and only good for ISM.