KEY DATA: ADP: +179,000/ ISM (NonMan.): +0.4 point; Orders: +1.0 point/ Layoffs: 53,073/ Deficit: $0.9 billion wider
IN A NUTSHELL: “The labor market remains tight and that could be the major reason we see a slowdown in job gains.”
WHAT IT MEANS: Today was a major data dump as a number of releases were held back yesterday due to the national day of mourning. Tomorrow is Employment Friday and the usual Wednesday ADP private sector job report was released today. It showed solid hiring occurred in November, but at a slower pace than had been the case. While middle and large-size firms added to payrolls strongly, small businesses have not been hiring lots of workers. This may be due to their inability to match the higher wages being paid by the larger companies. I suspect the government’s report will mirror this slowdown.
That a lack of workers may be behind any job gain slowdown could be inferred from the latest report on economic activity in the services and construction sectors. The Institute for Supply Management’s NonManufacturing Index rose in November, which was surprising. New orders continue to expand sharply, creating burgeoning order books. That should keep activity strong for an extended period. Despite the growing demand, hiring expanded at a somewhat slower pace. It is not as if firms don’t need the workers, they do. They may be finally hitting the wall that most economists expected to see months ago. It is hard to hire when there are not a lot of workers available.
Despite the strength in the labor market, layoffs have been increasing. Challenger, Gray and Christmas reported that worker cuts have rose sharply this year. The November number jumped by over 50% from the November 2017 total. For the first eleven months of the year, layoff announcements have soared by over 28%. While the economy is strong, not every industry has benefitted and the changing industrial structure has led to a restructuring of worker needs.
Maybe the biggest uncertainty about the economy is trade. Last week, I wrote that I thought the trade deals and announcements were more puff than pastry. It looks like the markets think that is possible. And the widening in the trade deficit in October didn’t help. Adjusting for prices, both exports and imports were down. The trade battles are not adding to growth, at least so far, and it is unclear how they will be beneficial in the long run. Undoubtedly, the Chinese are looking to diversify their supply chains to limit dependence on the U.S. and to open other markets for their goods. That can only lead to reduced exports to China in the future.
MARKETS AND FED POLICY IMPLICATIONS: The markets are in disarray while the economy remains in good shape. Are investors looking at the wrong thing? Yes and no. To the extent that the uncertain messages being sent about the status of trade negotiations with China are creating fear, there is every good reason to mark down values. That is especially true if you believe, as I do, that values were probably too high to begin with. Little risk was priced into them and the markets may have gotten ahead of themselves. I noted that a few months ago and it looks like that is starting to hit home. But I don’t agree that the Fed’s normalization policy or the potential inversion in the yield curve should be taken as signs the economy is about the crash and burn. If the economy were so strong as so many say, why would an extra 25 or 50 basis points make a major difference? That is the difference between three or four moves next year, which so many say are threatening, and one or two increases, which commentators and business leaders claim are non-threatening. Seriously, you cannot have a robust economy and a fear of an additional half percent increase in rates. The two are inconsistent. I know, consistency is the hobgoblin of little minds, but sometimes you need an argument to hold together. The Fed bashers just don’t have a consistent argument. As for the yield curve (10-year minus two-year) inverting, that is where consistency is foolish. You have to understand why the curve is inverting. In the past, the Fed was always jamming on the breaks. That is, the funds rate was way past neutral. Even if the Fed does raise rates one full percentage point next year, the rate will not be much, if anything, above neutral. The inflation-adjusted fed funds rate has to be significantly higher than it is currently. Indeed, it is still negative, and the curve normally doesn’t invert under these circumstances. If it did, it would not be because the Fed tightened excessively. So, the markets need to look for other scapegoats. I go with the over-valued market theory created by the belief that the tax cuts would produce an extended period of excessively high growth. When you get your economics from politicians, it appears you not only get the economy you deserve but the markets you deserve as well.