KEY DATA: ADP: +291,000; ISM (NonMan.): +0.6 point; Activity: +3.9 points; Employment: -1.7 points/ Deficit: $48.9 billion (11.9% wider)
IN A NUTSHELL: “When winter doesn’t strike, the data can become weird.”
WHAT IT MEANS: It’s Employment Friday week and that makes it ADP Wednesday, the day when we get a rough estimate of private sector job gains. ADP, an employment services company, thinks businesses went crazy hiring people in January. The estimate was for robust job gains, well above consensus. But the details should be viewed carefully as there was a very mild month for winter weather. For example, two sectors that are sensitive to climate quirks, construction and leisure and hospitality, added a total of 113,000 new workers. That is way above anything that would be considered reasonable. Indeed, Mark Zandi, chief economist of Moody’s Analytics, noted that: “Mild winter weather provided a significant boost to the January employment gain. … Abstracting from the vagaries of the data underlying job growth is close to 125,000 per month…” That doesn’t mean that Friday’s job number will not be good: Just don’t assume it would be a good idea to bet the farm on a blockbuster number.
The nonmanufacturing sector accelerated in January, which really should not have been a surprise. This segment of the economy is very sensitive to weather conditions and they were pretty good last month. The Institute for Supply Management’s index rose a touch as activity improved solidly. Still, the details were mixed. Hiring moderated, orders increased a bit faster and backlogs thinned more rapidly. The big change was in imports, which surged. Got me why that happened.
Remember how the trade deficit shrank dramatically in November and hopes were that things were turning around? Well, never mind. The shortfall rebounded sharply in December, led by a sharp increase in imports. We bought a lot more energy products, consumer goods and technology. Export growth was decent, but hardly as strong as the demand for foreign products. But the only really solid segment was energy, so we are really not seeing any great demand for our products. As for the China situation, the monthly deficit continues to narrow and the total for 2019 was $74 billion, or 17.6% less than in 2018. That’s a big change. Overall, the deficit narrowed modestly, less than 2% as a solid decline in the goods shortfall was partially offset by a drop in the services surplus. Still, that was the first decline in six years. Since that entire drop came from the huge change in the China deficit, don’t expect further declines in the years to come.
MARKETS AND FED POLICY IMPLICATIONS: The economy is fine and the labor market is strong, but we need to get past this warm winter. If the better than expected economic numbers have been weather driven, we will pay for it when normal weather returns. That’s what seasonal factors are designed to do: If you get unseasonal conditions for some months, the more typical months get killed. So wait a few months to determine the strength of the economy. As for Friday, the consensus is for roughly 165,000, though I am a little lower. The ADP report argues for a number above 200,000. Watch the details. If this is a strong report but the major gains were in the weather-sensitive sectors, dismiss it. As for the markets, happy days are here again, the world is great and earnings are going to skyrocket. And if you believe that, let’s discuss my investment opportunity in a Broadway musical. First quarter growth is still likely to be below 2%, which hardly supports the rally we are seeing in the markets.