BLS Reports Shows Great Jobs Growth
The BLS Report beat the ADP report as it showed 228,000 jobs were added in November. This beat expectations by 28,000. The October report was revised lower by 17,000 and the September report was revised up by 18,000, making the revisions a wash. It’s interesting to see that the final report for September has the economy adding 38,000 jobs because the initial report was a 33,000 decline in jobs. I initially expected that number to not hold and it didn’t. The unemployment rate remained steady at 4.1%. The labor force participation rate was flat at 62.7%. Wage growth was disappointing which I find shocking given how low the unemployment rate is. Average hourly earnings were up 0.2% month over month which missed estimates by a tenth of a percent. The October report was changed to a 0.1% decline. Year over year earnings growth was up 2.5% which was two tenths below the expectations, but two tenths above last month.
The underemployment rate fell from 8.0% to 7.9%, showing further tightening in the slack of the labor market. The manufacturing jobs growth was 31,000 which was up 8,000 from last month. As you can see from the chart below, the year over year manufacturing employment growth has increased since the election. The manufacturing recession ended in 2016 and the sector added momentum in 2017. This chart makes it look like another decline is coming. The change in total employment was 57,000 which was better than the 484,000 decline last month. The jobs growth this year has averaged 174,000 per month which is down 13,000 from last year. That’s a reflection of the tight slack in the labor market because the economy grew much faster in 2017 than 2016. If the economy decelerates next year, there will be an even sharper decline in monthly jobs growth.
The chart below shows a breakdown of the job growth by industry. As you can see, the education and healthcare industry added the most jobs which is exactly what the ADP report showed. The leisure and hospitality segment added 14,000 jobs which is a big decline from last month because last month was impacted by the hurricanes. The fact that this month didn’t see a major dip because of this shows how strong the labor market was in November. The food and services industry added 18,900 new jobs. We’ll review the health of the restaurant industry after we finish discussing the jobs report.
The charts below show the industries with the most and least jobs growth. It’s interesting to see how lodging had such high jobs growth since the leisure and hospitality segment barely added any jobs. With an average wage of $21.02, these are solid jobs. Jobs were added to computer manufacturing, but lost in the electronics stores. This is representative of the shifts other industries are seeing as the economy changes because of the expansion of online retailing.
November Was Another Down Month For The Restaurant Industry
November comp sales for restaurants were down 0.04%. Comp traffic was down 2.50%. Both were better than the 3 month rolling average, implying that there has been improvement. The worst region was the Midwest which had a 1.7% decline in sales. The best region was Texas which had a 1.7% increase in sales. The year over year jobs growth in October was down 1.6% which was a big decline from the 1.2% increase in September. I find it surprising to see consistently negative sales growth this year despite the good economy. I think sales growth will be positive next year because of the easy comparisons, even if the economy decelerates slightly.
Risk Factors In 2018
We left off on the 8th risk in this list. The risk is a leadership change at the BOJ. The JCB chair, Kuroda, appears likely to be reappointed when his term ends in late April 2018. Abe won the Prime Minster election in a landslide in October which signals the status quo is likely to continue. The yield curve control policy will probably only be abandoned if Kuroda isn’t reappointed which means this risk is muted.
The ending of global central bank QE is mentioned again in the 9th risk on this list. This point says that the end of QE will cause longer dated government bonds to have higher yields in relation to short term bonds. The term premia has been in decline for decades, so it won’t necessarily increase just because QE is ended.
The 10th risk is that valuations and fundamentals are mismatched in U.S. equities. I disagree with this point because earnings growth and economic growth were great in 2017. There has been increasing multiples, but that generally comes along with bull markets. Stocks will fall if earnings fall, but that’s nothing new.
The 11th risk asks if the markets are ready for a correction since there hasn’t been one in almost 2 years. This is a weirdly phrased question because the markets would be causing the correction, so how could the markets not be ready for something they cause? The real question is what would cause a correction. If the catalyst is negative enough, it will cause a bear market. If not, stocks will stabilize quickly. It will be interesting to see what causes a selloff since nothing has been able to break this market for such a long time.
Conclusion - S&P500 up, VIX destroyed...
Wall Street applauded the jobs report as the S&P 500 went up 0.55% which was a new record. This means the S&P 500 is well on its way to having another up month, extending the record long streak to 14 months. This would be the first year ever without a down month. 2017 was the perfect year for stocks. The Dow also hit a new record as it was up 0.49%. That was the 65th record high close this year which is the 2nd most records ever. The most records were 69 in 1995. I think the Dow will break this record. It needs 5 more records in the next 3 weeks. The VIX was destroyed as it was down 5.71% to 9.58.
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