Private Sector Job Creation Misses Estimates, But Stocks Inch Higher

S&P 500 Nears Record High

Even though the BLS report missed expectations, the S&P 500 managed to eke out a small gain. It ended this solid week on a high note. S&P 500 was up 9 basis points on Friday and 1.78% on the 4 day week. It’s up 18.82% year to date and down just 1.56% from its record high. Any good news on trade will bring a new record high next week. On the negative side, the Nasdaq fell 0.17% and the Russell 2000 fell 0.37%. 

Even so, the VIX cratered 1.27 to 15 which signals the correction is over. On the other hand, the CNN fear and greed index fell 4 points to 35 which is fear. I expect it to finally get out of the fear category next week.

Even though the S&P 500 barely increased, only 3 sectors fell. They were utilities, communication services, and tech which fell 0.33%, 0.23%, and 0.15%. The tech sector will be impacted by Apple’s iPhone event on September 10th. Apple’s reaction on the news could be negative even if it offers products that get portrayed positively in the media. 

Hope is Apple launches a competitive product for the middle price range. Customers are realizing they can get 90% of what an $1,000 phone does for about $600. That makes middle priced phones more appealing. Increases in stocks were broad based.  But the best 2 sectors were materials and energy which increased 0.48% and 0.52%.  

The Leading Index’s Growth Rate Falls

ECRI leading index’s growth rate fell sharply from -2.1% to -2.9%. Before you get scared about a potential slowdown in 2020, keep in mind that the index actually increased 0.1. Growth fell because of a tougher comp. Even if the index decreases in the next few months, growth will recover. I’m not going to turn optimistic unless the index increases along with growth. 

As for now, the economy is stuck in potentially the worst part of this slowdown as Q3 GDP growth could be as low as 1.55%. I’m more worried about Q3 2019’s economy than I am 2020. Next week we will get the coincident ECRI index from August. I expect its growth to fall from 1.9% in July. I’m curious how far it falls in Q3. Growth could trough by the end of the year.

Growth could be as low as 1.55% because the NY Fed Nowcast lowered its estimate from 1.8% to 1.55% this week. The ISM manufacturing report caused the estimate to fall 0.32%. Even worse news is the Q4 Nowcast cratered from 1.57% to just 1.08%. Personally, I expect Q3 growth to be worse than Q4 growth. 

If the consensus gets that low over the next few weeks, we could see increased recession fears. S&P 500 won’t be near its record high much longer if that happens. As for now, it’s too early to judge because we have no data from October. It hasn’t even started.

Weak Job Creation

Headline job creation missed estimates and the past 2 months were revised lower. This wasn’t as good of a report as the ADP reading. Job growth is definitely showing signs of slowing which makes sense because the unemployment rate is quite low. Net revisions in the past 2 months equaled -20,000. 

As you can see from the chart below, the 12 month average of job creation fell to 173,000 and the 3 month average rose to 156,000. That’s relatively strong considering how full the labor market is.

Nonfarm payrolls increased 130,000 which missed estimates for 163,000 and the low end of the estimate range which was 150,000. That’s not a big miss, but the private sector result missed by much more. There were only 96,000 private sector jobs added which is about half of the ADP reading. This missed estimates for 150,000. There were 34,000 government jobs added. It’s bad to see government in 2nd place on the industry list of job creation. 

We finally saw an impact from the census as 25,000 temporary federal workers were hired. Some say the use of technology and the fact that the labor market is so full will mitigate hiring for the census. Most of the hiring will occur in 2020. It could act as a stimulus if there is a recession.

Given the weakness in the manufacturing data, it’s not surprising that there were only 3,000 manufacturing jobs added in August. That missed estimates for 8,000. There was a large negative revision to July’s reading as 4,000 jobs were added instead of 16,000.

Good Underlying Numbers

Job creation was weak, but the underlying numbers I usually look at were very strong. Firstly, the participation rate increased from 63% to 63.2% which beat estimates for 62.9%. Furthermore, the prime age labor force participation rate increased from 82% to 82.6% which is tied for the cycle high. This is such a sharp move, I wouldn’t be surprised if it is revised lower.

Monthly average hourly earnings growth was 0.4% which beat estimates for 0.3% and July’s reading of 0.3%. Yearly growth was 3.2% which beat estimates for 3.1%. July’s reading was revised from 3.2% to 3.3%. Length of the work week increased from 34.3 hours to 34.4 hours. 

Since wage growth and the length of the work week improved, obviously weekly earnings growth improved. Average weekly wage growth increased from 2.7% to 2.9% which was the highest reading since March. With such a good reading, real wage growth probably improved. The CPI report comes out on September 12th. Headline CPI is supposed to stay at 1.8%.

Conclusion

The stock market is riding high even though Q3 GDP growth could be below 2%. A recipe for this increase is positive news on trade and a solid consumer. Improvement in real wage growth will be great for the consumer. Obviously, if the consumer is extremely strong in Q3, it could boost GDP growth to a more respectable level. 

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