125,000 Jobs Added & 1.9% GDP Growth

MBA Housing Applications

On the heels of the very strong September pending home sales report, the MBA housing applications report in the week of October 25th showed solid improvement after yearly purchase growth dipped in the previous week. Specifically, the composite index had weekly growth of 0.6% after it fell 11.9%. 

Purchase index was up 2% after falling 4%. That moved the yearly growth rate up from 6% to 10%. Now the results look very healthy again. Obviously, comps are getting much easier as the housing market was weak last fall. Last year the 30 year fixed rate was 4.86% in the week of October 25th. As of October 24th, the rate was 3.75%. It’s up from its recent bottom of 3.49%, but it’s nowhere near the peak of 4.94% in mid-November 2018. 

Because of the recent rise in rates, refinancing activity has cratered. That’s not a big deal as I focus on purchases. Specifically, the refinancing index was down 1% weekly after falling 17%.  

Big Negative September Revision, But Solid October ADP Report

There usually aren’t huge revisions to the ADP report. They aren’t as big nor as delayed as the BLS report. We could see a big BLS revision 1 year after the fact. Specifically, the September ADP report was revised from showing 135,000 jobs created to 93,000 jobs created. 

That’s more bearish than the initial BLS report which showed 114,000 jobs created. ADP report was initially optimistic. Let’s see if the BLS report is revised down. The chart below shows the historical differences between the ADP and BLS reports.

As you can see, in October there were 125,000 jobs added which met estimates. That’s now a sequential increase from the revised September report. This report shows more of the same, namely a decline in job growth, but no sign of a recession. This level of job creation is near the amount necessary to keep up with population growth. Population growth varies, but this is the type of number consistent with a steady labor market that doesn’t have slack left.

Some argue that there is slack left and that job creation has fallen because of weakening demand. That’s not a crazy proposition because the economy is in a slowdown. If yearly GDP growth was accelerating towards 3%, we would undoubtedly see more job creation. On the other hand, job creation is being limited by the tight labor market. An argument is that job growth can’t be 250,000+ because of the tightness. But it would show above 150,000 jobs added on average if the economy was accelerating.

Details Of Solid October ADP Report

Bears will find fault with the fact that small firms created the least amount of jobs and very small firms lost jobs. Specifically, small firms added 17,000 jobs, midsized firms added 64,000 jobs, and large firms added 44,000 jobs. In the small business report, very small firms lost 12,000 jobs and other small firm added 30,000 jobs. This is the 5th decline in the past 6 months for very small firms. Before May 2019, very small firms added jobs for 32 straight months with only 1 other decline in 64 months.

An obvious concern is that this weakness in very small firms will spread to larger firms. This weakness is in tune with the big decline in corporate profit margins. Small firms are seeing issues despite what the NFIB small business confidence index shows. 

S&P 500 earnings also fell in Q3, but investors are looking for some improvement in Q4. There needs to be a cyclical turnaround in 1H 2020 to avoid a recession. Growth is always trending in some direction. If growth trends down while the economy is in a slowdown, that means a recession. Many don’t see a recession coming, but it’s a possibility.

It’s no surprise goods producing firms lost jobs because the manufacturing sector is in a slowdown. Specifically, goods producing firms lost 13,000 jobs and manufacturing firms lost 4,000 jobs. Service providing sector added 138,000 jobs. As usual, the education and healthcare industry added the most jobs as it added 41,000. Professional and business was relatively weak as it only added 18,000 jobs.

1.9% GDP Growth

Q3 GDP report was slightly better than estimates. Quarterly growth was 1.9% which beat estimates for 1.7% growth and fell from Q2’s rate of 2%. I expected growth in the high to mid single digit range, so this report wasn’t a surprise. Yearly growth was 2%, supporting the slowdown narrative. NY Fed’s estimate for 1.91% quarterly growth was spot on and the Atlanta Fed’s estimate for 1.7% growth was close.

The table below reviews the details of this report. Consumers kept this report from being a disaster as growth was 2.9% which beat estimates for 2.6%. That’s down from 4.6% in Q2 which was an amazing quarter for the consumer. Durable goods consumption growth was 7.6% following 13% growth. Consumption growth helped the GDP report by 1.93%. Meaning without any consumption growth, GDP growth would have been near 0%.

Real residential investment growth finally helped GDP. Its growth was 5.1% as it helped GDP for the first time since Q4 2017. It added 0.18% to growth. It might help growth even more in Q4 as the September pending home sales report was very strong. GDP price index was up 1.7% which missed estimates for 1.8% and Q2’s 2.4%. Inflation is low. Government spending growth was 2% as federal spending growth was 3.4% and state/local growth was 1.1%.

One of the main reasons this report wasn’t strong despite solid consumption growth was non-residential fixed investment growth which was -3%. Spending on structures fell 15.3% mainly because of oil. Equipment spending was down 3.8%. Net exports and the change in inventories weren’t big factors as they pulled down growth by 8 basis points and 5 basis points. 

Overall, this report was OK. It could end up being worse if there are negative revisions. There is no recession, but there is a slowdown. 

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