Labor Markets, The Consumer, And Holiday Spending Trends
Summary
- The September ISM data intensified fear of a U.S. recession, but those fears are overblown.
- The labor data remains strong and is fueling consumer health.
- The outlook for holiday spending is robust and will likely outpace estimates.
- This labor-market bellwether just raised guidance, not a move I'd expect to see on the cusp of a recession.
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The ISM data shocked the market and intensified fears of an impending U.S. economic recession. While the contraction in manufacturing is a concern, the fears of a general recession are overblown. The labor market is still robust and indicates solid economic activity for the remainder of the year. The Trade War may have sparked some volatility in the data, but it's not a precursor of market doom.
To start, manufacturing is only 10% of the entire U.S. economy. A 10% contraction in the sector would only impact the overall economy by 1% (+/-) and, quite frankly, it would be needed. I'll get to this more in a bit, but there are too many jobs open right now and not enough employees to fill them. There is going to be a contraction, if not in the general economy then in the individual sectors, industries, and businesses that are unable to fill positions.
Looking at the ISM data and specifically the labor component, both the services and manufacturing sectors have been adding jobs at a steady clip for over 3 years. A little contraction and consolidation is not only overdue, it's a welcome and healthy event that will lead to future expansion.
Source: own work, data source from ISM
Why The ISM Isn't That Big A Deal
The ISM data isn't that big a deal for a number of reasons that all center on the labor markets. The labor market data reflects a downturn in momentum but by no means does it show a contraction of activity however small.
Starting with the NFP Report, job creation is steady and, despite the less-than-robust report, still quite strong. The headline NFP figure for September is 136,000. This is a bit below expectations and down from the previous month, but those negatives are mitigated by many factors.
The previous two months were both revised higher, adding a total of 45,000 to this month's headline. Total new jobs reported are 181,000, the three-month average of job creation is 156,000 and the YTD monthly average is 161,000. Solid if not strong average job gains, not robust but good figures.
Source: own work, data source from BLS
The ADP figures back up what the NFP is telling us. Job gains averaged about 144,000 over the past three months (less than the NFP) and 164,000 for the year (more than the NFP). Whatever the case, job creation is still net-positive and solid and picked up over the past three months.
Source: own work, data source from ADP
The really exciting data, in terms of job creation, is the Challenger, Gray & Christmas report on job cuts. Within that report they track the number of planned hires, and planned hiring this year is robust no two ways about it. The YTD figures put us firmly on track for the second-best year for hiring on record. Like I said before, there may be some contraction in some areas of the economy, but it's not happening in all areas.
Source: own work, data source from Challenger, Gray & Christmas
Unemployment At New Low While Labor Force Grows
The unemployment level hit 3.5%. This is 0.2% below the previous month and a 50-year low. What makes the number so much better than just a low figure is that the labor force has been growing over the past year as well.
The labor force participation rate was unchanged in the last month but sitting at a multi-year high and a half percent higher than last year. The employment to population ratio also held steady in the past month and also at a multi-month high.
This data shows that employees are being scooped up by employers at a faster pace than new workers are entering the labor market. This condition is resulting in declining unemployment and tightening labor markets.
Source: own work, data sourced from BLS
The JOLTs report, among other details, shows the number of job openings is on the rise. There are now over 7.2 million available jobs in America, just off the all-time high, which far outpaces the number of available workers.
According to the NFP report, there are only 5.8 million Americans classified as Unemployed. This means U.S. unemployment could go to 0% tomorrow and there would still be 1.4 million job openings. Based on this, I see no reason why unemployment won't continue to fall, or why any American would ever accept minimum wage.
Source: BLS
Jobs Cuts Are On The Rise, Oh No!
The rising level of job cuts is another red flag for the labor market but not one indicative of market doom. Increased turnover is a result of many factors including the trade war but also ongoing bankruptcy/restructuring in retail and similar trends in the tech industry. In the past month, the retail sector led job cuts but also with job creation.
Job cuts fell -23% month to month and -24.8% YOY to post the 2nd lowest level this year. Despite the decline, this year's job cuts are up 27% on a YTD basis. This is a four-year high. The 3rd quarter is down from the previous quarter as well but up 10% YOY.
Source: own work, data source from Challenger, Gray, & Christmas
The job cuts number shows an increased number of cuts, but this is mitigated by near-record job creation, job openings, and unemployment. Now, as I've said before, job creation is on the rise and creating a situation in which workers are hired faster than they are entering the labor force. This situation includes job-losers, those workers are also getting scooped up faster than they become available. A look at the jobless claims data helps reinforce this idea.
Initial jobless claims have ceased their downtrend but remain very low relative to that trend. At these levels, initial claims indicate the lowest level of labor market turnover since the 1960s. The continuing claims data confirms this. The continuing claims data is also trending at long-term lows and very close to setting a new one. At these levels, the data is showing the few employees who find themselves without work involuntarily seldom wait more than two weeks for a new job and demand is picking up.
Source: BLS
Referring back to the JOLTs report, it shows the level of voluntary job leavers is trending at a record. This is a sign of labor market confidence, it means people are quitting their old jobs in favor of newer, higher-paying work.
The Total Jobless Claims data brings it all back around to job creation and unemployment. The pace of job creation and availability of positions is having a net positive effect on the total number of Americans receiving unemployment. There has been a notable change in the trend of the total claims data, but it remains at low levels relative to trend.
Source: own work, data sourced from BLS
The recent change in trend, from down to sideways, is evidence of labor market tightness. As tight as the labor market gets, there will always be some churn in employment. That baseline churn has manifest itself as flattening trends in all three jobless claims metrics.
Labor Markets And The Consumer
Labor market strength is consumer strength. Employees work for money, employees are consumers, and consumers spend. In terms of earnings, earnings are on the rise. The average hourly wage fell by a penny in the last month but who cares? Average wages are up 2.9% over last year and have been trending at the +3.0% level for a year. Before that, wages were trending 2.5% higher on a monthly YOY basis for over two years.
Source: own work, data sourced from BLS
Rising wages are showing up in the spending data. Personal Spending data in the last month was a bit tepid at 0.1%, but the average over the past 5 is 0.4%. The monthly average for the year is closer to 0.6%.
The University of Michigan Consumer Sentiment came in at 93.2 in September, up 3.4 from the August reading and hotter than expected. Improvement is due to favorable labor trends, but there are some signs of weakness. The index has begun to erode due to uncertainty over the trade war, Brexit, and other geopolitical events so there is a reason for caution.
Source: Advisor Perspectives
The latest estimates for holiday spending are as strong as the labor data. Deloitte is forecasting a 4.5% to 5% jump in holiday sales and they are not the only ones. The NRF's projections are a little more conservative but still strong at 3.8% to 4.2% and on track to beat last year. Within this, sales at online retailers are expected to grow by 18%.
NRF President and CEO Matthew Shay
“The U.S. economy is continuing to grow and consumer spending is still the primary engine behind that growth, ... Nonetheless, there has clearly been a slowdown brought on by considerable uncertainty around issues including trade, interest rates, global risk factors and political rhetoric. Consumers are in good financial shape and retailers expect a strong holiday season. However, confidence could be eroded by continued deterioration of these and other variables.”
We Don't Need A Trade Deal
It is clear that the U.S. consumer-driven economy is in fine shape. What is also clear is the biggest drag on growth is not the trade war, it is uncertainty surrounding the trade war. CEOs, businesses, and consumers don't know what is going to happen and that is creating an air of caution. In this light, it's not a trade deal we need but certainty the new status quo will be maintained. A trade deal will be great, but we don't need it for economic growth.
The Labor Market Bellwether
Cintas (CTAS) - Cintas is a labor-services business providing route-driven uniform delivery, first-aid, and fire-safety products to businesses of all variety. If there was ever an indicator of labor market health, it is this company; it is the largest labor-services company in the U.S.
Cintas just reported 3Q earnings and, not surprisingly, beat expectations. Revenue grew by 7.1% YOY, EPS of $2.32 beat by $.17 adj. and $0.19 GAAP. Organic revenue growth is up more than 8.0% and margins both gross and operating increased 130 bps.
Results were good enough for the company to raise guidance to a range above consensus and drive the stock 5% higher. Sales are expected to increase by +6%, not something I'd expect to see if the labor economy was contracting.
With explosive earnings growth becoming ever elusive in today's market I expect dividend growth stocks will outperform the broad market over the next few years.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.