With the fireworks of the globally coordinated liquidity bomb that was dropped on the markets this morning the usual economic data releases were somewhat lost in the fray. There were three key releases this morning that deserve your attention since it is ultimately the economy that will continue to drive the markets in the coming months ahead. It is important to note, and somewhat a bit suspiciously, that each of these reports came in much stronger than estimates to the tune of 3 and 4 standard deviations above the estimate. This is far from the norm and leaves a lot of room for strong downward revisions in the weeks ahead. However, with that note, let’s get started.
ADP Employment Report
While the ADP report is not a great employment gauge to look at in terms of trying to gauge what the BLS employment report will look like – it is a report on employment nonetheless. Today’s ADP report came in much stronger than expected with a 206,000 job increase that was 86% related to private service sector jobs in very small businesses. From the release:
“Employment on large payrolls—those with 500 or more workers—increased 12,000, and employment on medium payrolls—those with 50 to 499 workers—rose 84,000 in November. Employment on small payrolls—those with up to 49 workers—rose 110,000 that same period, up from the 67,000 jobs created among small businesses last month. Of the 110,000 jobs created by small businesses, 15,000 jobs were created by the goods-producing sector and 95,000 jobs were created by the service-producing sector.”
However, the problem with the report is that an individual has to only work ONE hour within the given reporting period to be counted as employed. Therefore, considering that they were many part time employees hired for the “Black Friday” shopping spree, and mostly in the area of small businesses that only need an additional part time hand for the Christmas season, we will soon see terminations pick up once the rush of the shopping season has passed. This is why it is dangerous to extrapolate the end of year hiring into something like a “return of the economy.” It pays to keep these things in perspective.
While there is a mad scramble to up the BLS employment estimates for Friday’s release of the job report don’t forget last year when ADP reported November at 122,000 followed by a 246,000 in December. Unfortunately, it didn’t translate well into the BLS report which printed just 93,000 and 152,000 respectively during the same period.
CHICAGO ISM REPORT
The Chicago Institute Of Supply Managers Index released this morning also reflected a better than expected uptick in the data with the index rising from 58.4 in October to 62.6 in November. On the positive side of the report were increases in New Orders rising from 61.3 to 70.2, Production moving up from 63.4 to 67.3 and Order Backlogs picking up from 51.2 to 55.1. These all bode well for continued manufacturing strength in the region through the end of the year.
The negatives in the report came in terms of Employment which sagged from 62.3 to 56.9, a draw down in Inventories from 54.4 to 53.6 and Capital Equipment falling from 120.9 to 120.1.
The bulk of the report was decent and while it doesn’t show significant strength in any of the components in turn there isn’t significant weakness there either. The report is very noisy overall and the recent cycle peak seems to be in. The next couple of reports should give us a much better clue as to the state of the region as it relates to the overall economy.
PRODUCTIVITY AND WAGES
The rebound in U.S. nonfarm productivity growth was not as strong as previously estimated in the third quarter as the Labor Department downwardly revised its previous estimate of 3.1 percent to 2.3% for the 3rd quarter.. Even more disturbing was the decline in wages for two straight quarters.
We have been writing recently about the very disturbing drop in the personal savings rate even as consumers went on a spending binge due to higher utilities and medical costs primarily. This decline in wages in the second quarter was partially offset by lower oil and gasoline prices but with oil now surging past $100 a barrel the impact of higher energy costs on declining wages will hit consumers much more quickly.
While productivity and wages surged post the 2008 recession the economic weakness has continued to persist and are now dangerously pushing the economy towards the next recession. Notice that during the 2001-2002 recession, which was market related bubble recession more than a “business cycle recession”, wages and productivity held up fairly well. However, as the world became engulfed in the credit boom and the ultimate financial credit crisis productivity and wage growth declined. The net effect of this wasn’t as noticeable prior to 2007 as individuals had access to credit and leverage to fund the differences between incomes and desired living standards. However, today that story is quite different. The back to back quarters in negative wage growth is crimping consumption forcing consumers to drastically reduce personal savings rates. This is a short term fix that leads to a longer term economic problem. Furthermore, the sharp decreases in production are also concerning showing that economic growth at its core is very weak indeed.
Outlook Remains Cloudy
The economic picture remains one of significant weakness particularly below the surface. The recent liquidity boost to the market by the coordinated efforts of the global community may have temporarily boosted the financial markets but have done little to solve the longer term economic problems that continue to plague both the U.S. and the Eurozone. With China now showing significant signs of slowing the real danger of a recession in 2012 most likely has only been postponed. The real issue remains with the consumer who is running out of places to find extra consumptive capability. The recent rush for “Black Friday” discount sales may very well have been the consumer’s last gasp of purchasing power. The next couple of months will be very telling as to the strength of the real economy and the success of global financial interventions.