KEY DATA: ADP Jobs: 213,000; Conference Board Help Wanted: -137,200; ISM (Man.): -2.4 points
IN A NUTSHELL: “The economy doesn’t seem to have picked up any steam in September.”
WHAT IT MEANS: We had great growth in the spring but that high rate doesn’t look to have been sustained as the summer ended. Today’s string of September numbers were simply disappointing. The ADP estimate of private sector job gains was okay, but below what we need to have for the labor market to really be strong. Essentially, it looks like it was more of the same. What this means for Friday’s number is unclear. ADP believes that the private sector created about 415,000 jobs in the last two months. The Bureau of Labor Statistics’ first estimate of August private sector payrolls was a modest 134,000 rise. Barring a major upward revision to the BLS August number, to get the two in synch would mean job gains of at least 250,000. As for the ADP report, small and large businesses hired solidly. The softness was in the mid-sized sector. Why? That is anybody’s guess. As an added insult to those of us who think that the labor market is stronger than perceived, the Conference Board reported that online want ads fell sharply in September. The trend is still up but the data are bouncing around an awful lot.
On the manufacturing front, the sector continues to expand solidly, but maybe not as robustly as it had been. The Institute for Supply Management’s September activity index fell led by a sharp deceleration in order growth. Let’s keep in mind that this is a diffusion index and if you reach a high level of orders and stay there, the index actually goes down. The level of the index is still very high, indicating that demand is strong, which can be seen in robust and expanding production. Hiring, though, did moderate. Let’s see now: Orders are flowing in, production is ramping up but job growth is softening. Got it. Maybe the shrinking of backlogs can explain that.
MARKETS AND FED POLICY IMPLICATIONS: The first estimate of third quarter growth will be released at the end of October, so we have a month to wait. It looks like the economy continued on a solid pace during the summer but well off the 4.6% rate posted in the spring quarter. The recent data have provided few signs that the economy is picking up steam. It would be nice to get a few quarters in a row of north of 4% growth but I doubt we will get that for a while. Third quarter growth should be closer to 3% than 4%. But at least the last six months have been pretty good. Growth in the 3.75% range is something we have dreamed about yet people are discounting it. I think that says a lot about how we are evaluating the economy. Meanwhile, investors are waiting for Friday’s employment report and watching Hong Kong and the dollar, so who know if even today’s numbers will matter much. As for the Fed, it still is all about the labor market and that means Friday is the big day. I am sticking to my stronger than expected forecast but the consensus is for something in the 220,000. An average number will keep the pressure off Fed Chair Yellen, but only as long as the other data remain moderate.