KEY DATA: ADP: +174,000; Manufacturing: +1,000/ ISM (NonMan.): +1 point; Orders: +3.2 points; Employment: +6.5 points
IN A NUTSHELL: “The labor market isn’t falling apart, but it isn’t booming either.”
WHAT IT MEANS: With Congress trying to figure out what to do about the next stimulus bill, the economy will have to make do with what is already in the pipeline. Given the bill passed in December contained over $900 billion in aid, that is a lot of help. And it may need it. On Friday, we get the government’s reading on January payroll gains and today we received an indication of what it might look like. The ADP estimate of the private sector changes points to a decent, though not great job gain. Of course, there was a decline posted in December, so up is good, at least when it comes to jobs. Almost half of that rise was in health care, which should surprise no one given the virus surge and the vaccine rollout, as well as leisure/hospitality, which benefitted from some relaxing of restrictions. Yes, it seems dumb to reopen when the virus is surging, but who said politicians are rational? The strong housing market helped drive up construction hiring strongly. The only really weak sectors were manufacturing and information, which were basically flat. Manufacturing had been adding workers at a pretty solid pace, so any falloff there could slow overall job gains. Looking across company size, it looks like large firms are moving cautiously on the job front, while small and medium size companies are adding workers at a moderate pace.
The service sector continues to rebound. The Institute for Supply Management’s index of nonmanufacturing activity rose in January to a level not seen in almost two years. That is impressive. Of course, that is not to say the sector is booming. This is a diffusion index and if you just stop falling, that is, move from declining to stable, the index rises. That was the case with the rise in orders and especially hiring, where the number of firms cutting their workforces fell sharply while the share increasing payrolls was largely flat. Nonetheless, this was a good report that points to growing strength in the services and construction components of the economy.
IMPLICATIONS: Today’s reports don’t really tell us much, other than the economy is still expanding. On Friday, we get an important employment report. Payrolls fell by 140,000 in December and it will be interesting to see the extent of the snap back. I think it could be larger than ADP estimates. I am closer to 300,000 than 200,000. But I also think that we are due for a rise in the unemployment rate. That would confuse the situation, especially if my job gain estimate, which is strong, turns out to be in the ballpark. A strong job increase coupled with a rise in the unemployment is not what we want to see. Regardless, given how fast the economy has rebounded from the spring collapse, a slower, but still decent growth rate is likely. And that likelihood is what is creating some of the political differences in Washington. One side asks if we really need a massive stimulus bill if the economy continues to expand moderately. The other asks if we can risk not doing enough, given the pain being felt by so many households and businesses. But the Democrats have control and a stimulus bill of some size, most likely larger than the one passed in December, could get signed into law by the end of the month. That should cement growth for the rest of the year. How strong it will be is uncertain, as we don’t know how much of the stimulus will go to households and businesses that don’t really need it and therefore will disappear into the abyss. Regardless, by the end of the year, the economy could return to the level it was at before the pandemic hit.