Redbook Retail Sales Growth
In the week of January 4th, Redbook same store sales growth fell from 7.8% to 6.1%. The month looks to be starting off on solid footing. It will be interesting to see the impact of the minimum wage increases. A modest decline in the expectations index in the Conference Board consumer confidence report doesn’t appear to have successfully predicted a downturn based on the first week of sales.
Consumer spending could end up being very important for Q1 GDP growth if trade doesn’t help GDP as much as it did in Q4 because U.S. imports from China rebound. Many are still focused on December’s retail sales report. 7.8% Redbook sales growth in the last week of the month is a good sign for monthly sales growth especially since the comp was very tough.
Strongest ADP Report Since April
December private sector ADP jobs report was very strong compared to its recent readings and the November reading was revised up significantly. November job creation was 124,000 instead of 67,000. That’s almost double the number of jobs added. Even though it doubled, it was nowhere near the 254,000 private sector jobs added the BLS report showed. It was way off last month.
In December, it showed 202,000 jobs were added. That was above the consensus of 157,000 and the high end of the estimate range which was 180,000. While that’s below the last BLS report, that’s the highest job creation the ADP report has shown since April.
A remaining question is if this means the BLS report will be great or if it just means the ADP report is getting closer to reality. Either the ADP report will be near the BLS report or it will be a great report. Obviously, it can also be too optimistic. It’s certainly above current estimates.
Consensus for private sector job creation is 150,000 and the overall estimate is 155,000. Highest estimate for private sector job creation is 175,000. Historically, this ADP report is consistent with 184,000 private sector jobs added in the NFP report. That would be very solid. Remember, the November BLS report was boosted by the GM strike ending. Usually great readings are revised lower, but that might not happen because of this one time event.
One of the biggest criticisms of the ADP report is that yearly employment growth is falling (1.53% growth which is the lowest growth since February 2011). The 12 month and 6 month moving averages have been falling as well. Personally, I will not hold weak reports from a few months ago against this update. I will not criticize an upward revision combined with a beat of the top end of the estimate range.
Specifics Of The Solid ADP Report: Small Business Job Creation Rises
Small business job creation has mostly been a sore spot of the ADP report since May. This reading wasn’t bad as small firms created 69,000 jobs. That was up from 36,000 in November and was the highest since January. Plus, very small firms with 1-19 employees created 9,000 jobs which was up from a loss of 10,000 and the highest since September. Yearly growth was only 6 basis points which was the lowest since February 2011, but growth should bottom if reports like this lap the weakness seen last year.
Small businesses have been hurt by margin compression due to strong wage growth. Good news is the Markit services report, which includes small firms, showed output price growth was above input price growth. 19,000 goods providing jobs and 50,000 services jobs were created by small firms in December. Services sector is clearly more important. It’s also more reliant on workers.
Manufacturing costs could come down as tariffs go away, but service sector costs could go up with the recent minimum wage hikes. You can see in the charts below how small caps have been underperforming large caps. Since the peak late summer in the of 2018, small caps are down 7%, mid caps are flat, and large caps are up 11%. That weakness is multiplied for very small firms which aren’t close to being large enough to make the S&P 600.
Large firms added 45,000 jobs and mid sized firms added 88,000 jobs. Goods providing firms added 29,000 jobs. Manufacturing firms lost 7,000 jobs and construction added 37,000 jobs which was the highest since April. Yearly construction job creation increased for the 2nd straight month. That’s the first 2 month streak since July 2018. The improvement in the housing market is boosting construction.
Service providing firms added 173,000 jobs. Leisure and hospitality lost 21,000 jobs and information lost 14,000 jobs. Information jobs are high paying, so this loss might lead to a decline in wage growth. The labor market has been criticized because the acylical education and healthcare industry has been leading job creation. That wasn’t the case in December as the industry added 49,000 jobs which was the 3rd most.
Professional & business added 61,000 jobs and trade, transportation, & utilities added 78,000 jobs. That was the 2nd most jobs ever added by trade, transportation, and utilities going back to May 2002 when the data starts. 79,000 jobs were added in this industry in June 2005. I wonder if this feat will be repeated in the BLS report since it is so unusual.
Professional and business job creation was also relatively strong, but obviously not as good as trade, transportation, and utilities. Professional and business job creation was the highest since April. Even so, yearly growth actually fell 2 basis points to 2.1%.
Conclusion
Redbook retail sales growth at the end of December and in the beginning of January was strong. ADP job creation improved from December. If job creation in the BLS report falls modestly, it will be a good report. December ADP report caused worries about small business job creation to disintegrate.
Personally, I don’t think a recession is coming just because yearly employment growth and the moving averages of job creation are falling. Considering the amount of margin compression firms are facing and how full the labor market is, job creation is solid.
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