Labor Market Shows Signs Of Weakness

Disappointing Jobs Report

Recent labor report disappointed estimates, but come out ahead of the ADP reading. The ADP report showed 307,000 private jobs added. The BLS report showed 344,000 private sector jobs added. That missed the consensus of 590,000 jobs and the lowest estimate which was 400,000. ADP finally got this one right after being wrong (too negative) most of the year. That’s like how value stocks finally had a good run after years of weakness. Even the losers win sometimes.

As you can see from the chart below, overall non-farm payrolls were up 245,000 which missed estimates for 500,000. It’s interesting that private payrolls missed the lowest estimate which was 400,000, but overall payrolls didn’t. There must have been a few economists who were very bearish on government job creation. They were correct to be bearish as the government hemorrhaged 99,000 jobs.

There is a small mistake in this graphic as October job creation was revised down 28,000 to 610,000. That revision was more than all because of the private sector which went from 906,000 to 877,000. That’s still a very strong reading. This sequential weakness in November signals the recent increase in initial claims before the Thanksgiving decline was right about there being labor market weakness. Ironically, this disappointment helped cyclical stocks and caused the long bond yield to increase because it made a stimulus more likely.

Mitch McConnell has been saying how great the labor market is doing to justify a smaller stimulus. Now that it isn’t doing as well, he might budge from his original proposal of $500 billion. There were 2 new Georgia Senate polls done by Trafalgar Group. They have Ossoff up by 1 point on Purdue and Loeffler up 5 points on Warnock. Those are against the other polls. If they are right 1 Dem and 1 Republican will win, but the winning candidates are flipped.

Where The Jobs Were

This wasn’t a great report, but it’s very far from signaling a double-dip recession. It’s worth noting since we are already 1 week through December, it’s highly unlikely that a stimulus or the vaccines will come in time to vastly change December’s labor report. However, if vaccines and a stimulus do come, the market will completely ignore the potentially weaker December labor report. 

If initial claims rise in the next 2 weeks, the odds of job losses in December will get close to 50%. Being potentially 1-2 months from a solution to this crisis saves the day. The reopening stocks would be crashing if it wasn’t for the vaccines.

As you can see from the chart above, if it wasn’t for transportation and warehousing, this would have been a disastrous report as it added 145,000 jobs. That’s 59% of all jobs created. There were 82,000 courier jobs added because of all the online shipments. Construction only added 27,000 jobs which was 5,000 more than what ADP said, but not as much as expected given the spike in homebuilding. 

Maybe builders have hired enough workers already. Manufacturing added 27,000 jobs which was down 6,000 and missed estimates for 40,000. We’re still waiting for the industrial production report to tell us if the ISM or Markit PMI was right. The ISM report was solid, but the Markit PMI implied an amazing industrial production report is coming.

The good news is unlike last month, almost all the decline in jobs in government was due to the census as it hurt employment by 93,000. State employment was flat and local employment was down 13,000. If state and local governments get stimulus money, it will directly lead to more hiring. 

Private education lost 6,000 jobs and healthcare added 60,000 jobs. Remember, the virus hurt hospitals dramatically because people went in for fewer elective procedures. This isn’t plastic surgery. We are talking about needed procedures like hip replacements that people are putting off for a few months.

Retail lost 35,000 jobs and restaurants lost 17,000 jobs. This will probably get worse in December and January. It’s impressive only 17,000 jobs were lost given the shutdowns. Most areas are allowing outdoor eating in tents. These tents have effectively become the same as eating indoors, but it’s being allowed which is all that matters from our vantage point. 

OpenTable shows in the first 3 days of December, there were yearly declines of 67.7%, 68%, and 65.2% in online, phone, and walk-in reservations. The restaurant industry is effectively dealing with a depression. The good news is the weakness will end by the end of Q1.

Details Of The Labor Report

At the trough of the financial crisis recession, payrolls were down 6.34% from the peak. We are now 6.45% off peak employment. This decline is about as bad as the worst part of the last recession even though we have had 7 months of strong job growth. Oxford Economics believes employment will recover 3.5 years after the recession started which means a full recovery is less than 3 years away. Most jobs will be recovered next year if the vaccines end COVID-19 by the spring.

The unemployment rate fell from 6.9% to 6.7%. Many thought it was crazy to predict that the rate to fall below 8% by the end of the year. Some disagreed with a call last week for the rate to fall below 6% by the end of next year. Let’s see what happens. The underemployment rate fell from 12.1% to 12%. It will fall to the high single digits next year.

In terms of permanent unemployment, this recession will be better than the financial crisis recession which is why the recovery will be quicker. The chart above shows permanent unemployment as a percentage of peak employment. We are very close to this percentage peaking. 

It will finally peak in early 2021 when the economy reopens. On a nominal basis, the total number of people permanently unemployed rose from 3.684 million to 3.743 million which is below the peak in September. It's unlikely that September was the ultimate cycle peak because the December labor report should be weak.