Orlando's Outlook: Head scratcher


Bottom line Despite a stronger-than-expected ADP report, the lowest initial weekly unemployment claims in 43 years during the all-important survey week and a solid start to the holiday shopping season, this morning’s labor-market report for November was disappointing across the board. Nonfarm and private payrolls were weaker than expected, with downward revisions for October. Manufacturing and retail hiring were negative for the fourth and second consecutive months, respectively, wage growth surprisingly declined, hours worked were flat a third consecutive month and the labor force participation rate declined.

True, the official rate of unemployment (U-3) plunged to a nine-year low of 4.6%, but that’s only because of a 15% month-over-month (m/m) surge in discouraged workers, who have left the labor force and have stopped looking for work. So in our view, the only positive aspect of today’s report was the rebound in the household employment survey, which rose by 160,000 jobs after losing 43,000 in October.

Regardless, we continue to believe that the Federal Reserve is on track to hike interest rates again by a quarter point at its Dec. 14 policy-setting meeting. But the overall sloppy tone of today’s head-scratcher of a labor report probably takes the potentially hawkish edge off of Chair Janet Yellen’s statement and press conference later that afternoon, and we’re still counting on only two more quarter-point hikes to follow over the course of calendar 2017.

ADP stronger than expected The ADP’s forward-looking proxy for private payroll growth reported a much stronger-than-expected increase of 216,000 new jobs in November, a five-month high (versus consensus at 170,000). However, October’s job gains were revised down to a weak 119,000 from a preliminary 147,000. In November, small firms with fewer than 50 employees added 37,000 jobs (17% of total, compared to October’s downwardly revised 18,000, or 15% of total); midsized companies between 50 and 500 employees added 89,000 (41% of total, versus October’s downwardly revised 40,000, or 34%); and larger companies with more than 500 employees added 90,000 hires (42% of total, compared to October’s downwardly revised 60,000, or 50%). So perhaps ADP is more of a leading than coincident indicator, as the revised decline in total jobs last month and the mix shift of jobs coming from small and midsized companies mirrored the weaker-than-consensus payroll increase we witnessed in today’s report.

Jobless claims hit another record low Initial weekly jobless claims, a leading economic and employment indicator, saw only 233,000 people file for unemployment insurance for the survey week that ended Nov. 12, a new 43-year cycle low. Most recently, claims bounced back to 268,000 for the week ended Nov. 26, while the smoother four-week moving average continued to grind lower at 251,500 currently. Continuing claims were 2.081 million for the week ended Nov. 19, slightly above the record low of 1.983 million achieved two weeks earlier.

Disappointing November nonfarm payrolls They grew by a slightly weaker-than-expected 178,000 jobs, marginally below the Bloomberg consensus of 180,000 but well below our own more constructive forecast of 218,000. The Bureau of Labor Statistics (BLS) revised September and October down by a combined 2,000 jobs, with September’s preliminary gain of 156,000 jobs revised up sharply to a gain of 191,000 jobs in October and again in November to 208,000. However, October’s preliminarily weaker-than-expected gain of 161,000 jobs was revised down to a gain of only 142,000 this morning. 

Private payrolls still soft They added only 156,000 jobs in November, well below the Bloomberg consensus at 175,000. However, the BLS revised September and October modestly higher by a combined 10,000 jobs, with September’s preliminary gain of 167,000 jobs revised up in October to a gain of 188,000 jobs and then again this morning to a final gain of 205,000. October’s preliminary gain of 142,000 jobs was revised down to a gain of 135,000 jobs.   

Government hiring remains positive Federal, state and local governments collectively added 22,000 jobs in November, versus downwardly revised gains of 7,000 in October (preliminary was at 19,000 jobs), 3,000 in September, 44,000 in August, 31,000 in July, 33,000 in June and 25,000 in May. In November, the feds added 3,000 jobs, local governments 14,000 jobs and states 5,000 jobs.

Household employment survey rebounds This admittedly volatile household survey rose by 160,000 jobs last month after losing 43,000 jobs in October, which represented the first decline in six months. Household employment had risen by 354,000 jobs in September, 97,000 in August, 420,000 in July, 67,000 in June and 26,000 in May. The household survey is a leading indicator for nonfarm and private payrolls, so the weaker October reading perhaps foreshadowed the weak November. It also serves as the basis for the official U-3 unemployment rate.

Participation, unemployment and labor-impairment rates all decline The civilian labor force declined by another 226,000 workers in November, extending the decline of 195,000 workers in October. September witnessed the addition of 444,000 workers, on top of adding 176,000 workers in August, 407,000 workers in July and 414,000 in June. Calculated from the household survey, the U-3 unemployment rate plunged to a new nine-year cycle low of 4.6% in November from 4.9% in October and from 5.0% in September. But this was largely due to a 15% m/m increase of nearly 600,000 discouraged workers. The labor-force participation rate also ticked down to 62.7% in November, from 62.8% in October, 62.9% in September and the two-year high of 63.0% in March. But it remained above the 38-year cycle low of 62.4% in October 2014. The labor-impairment rate (U-6) – known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed – fell to 9.3% in November, a new eight-year cycle low, from 9.5% in October and 9.7% in September.

Wage growth slips, while hours worked remain flat On the heels of a strong 0.4% increase in October, hourly wages surprisingly fell on a m/m basis by 0.1% in November. That translates into a disappointing year-over-year (y/y) wage increase of only 2.5% in November, compared with a 2.8% jump in October, the most since 2009. The average private workweek for all employees remained steady for the third-consecutive month at 34.4 hours worked in November, versus a two-year low at 34.3 hours in August. Each additional 0.1 hour worked is the equivalent of adding an estimated 350,000 jobs or more to the economy.

Manufacturing remains negative, construction still positive Manufacturing lost 4,000 jobs in November for the fourth consecutive negative month, versus job losses of 5,000 in October, 6,000 in September and 16,000 in August. The ISM manufacturing index rebounded back to 53.2 in November from economic contraction territory at 49.4 in August. So while these continued manufacturing job losses are disappointing, we do expect them to turn positive in coming months. Construction gained 19,000 jobs in November for the third-consecutive month, after adding 14,000 new jobs in October and 26,000 new jobs in September, which reversed the loss of 6,000 jobs in August, as housing continues to post solid results into the fall.

Retail loses jobs puzzling In one of the most confusing aspects of today’s report, given strong retail sales in September and October and a strong start to holiday sales in November, the retail sector shed 8,000 jobs in November and 9,000 jobs in October, after adding 23,000 new jobs in September, 17,000 in August, 13,000 in July and 22,000 in June. Retailers (and transportation companies such as FedEx and UPS) have talked about how they’ve beefed up their seasonal staffing – by offering strong wage gains – to prepare for Christmas, so this category could represent upward revision potential.    

Temps remain positive They rose a third consecutive month by 14,000 new jobs in November, on top of 7,000 new jobs in October and 34,000 in September, as the retail and the transportation shipping companies staffed up for holiday. An important leading indicator of employment growth, temps had lost 3,000 jobs in August.  

Leisure perks up This economically sensitive category added 29,000 new jobs in November, continuing the pace of solid growth from 15,000 new jobs in October, 8,000 in September and 10,000 in August. So the pace of leisure hiring has clearly started to perk up, although there’s still room to run, with 31,000 new hires in July and 53,000 new jobs in June.

Education & health care solid as a rock This sector added 44,000 new jobs in each of November and October, 38,000 in September, 56,000 in August, 42,000 in July, 52,000 in June, 46,000 in May, 47,000 in April, and 46,000 in March. Why would anyone struggling to find a steady new career option look anywhere else?

JOLTS steady The Job Openings and Labor Turnover Survey indicated that job openings increased 5.49 million in September (the most recent data available), marginally higher from August’s 5.45 million. Most of the details of the report also were little changed from August, with the hiring and quits rates at 3.5% and 2.1%, respectively (the hiring rate was a four-month low). However, the layoff rate fell to 1%, the lowest level for the survey that dates back only to 2000. Combine that with the drop in hires to 5.081 million from 5.268 million in August and the picture emerges that employers continue to favor holding onto their employees.

Reduced layoffs an early gift from Christmas The Challenger Job-Cut Report, which fittingly at this time of year from the firm Challenger, Gray & Christmas, said the layoff count in November fell to 26,936, down by 12.4% on a m/m basis and 13% on a y/y basis, representing one of the lowest readings since 2000. This corroborates the low unemployment rate of the jobs report.

To see Phil Orlando's thinking in action, click here.