February Private Sector Jobs and NonManufacturing Activity

KEY DATA:  ADP: +117,000; Manufacturing: -14,000/ ISM(Nonmanufacturing): -3.4 points; Orders: -9.9 points; Employment: -2.5 points

IN A NUTSHELL: “It looks like the economy may have been caught up in the polar vortex in February.”

WHAT IT MEANS:  While it is pretty clear the economy has been accelerating, it looks it hit a pothole in February.  On Friday, we get the first glimpse of the government’s estimate of job gains in February.  Today, the employment services firm ADP released its closely watched measure of private sector hiring, and the February increase was somewhat disappointing.  The total increase was about half of what was expected.  The details were a mixed bag.  A couple of the sectors hit the hardest by the shutdowns, retails and leisure and hospitality, appear to be coming back.  There were also solid increases in health care and business and professional services.  But two sectors that look to be leading the way, construction and manufacturing, posted declines in their payrolls.  As for what size firms are adding workers, it looks like the gains are being spread across all categories.  None of them were high, though the small and large companies were somewhat cautious in their hiring.

Meanwhile, the long-suffering services portion of the economy may have hit another temporary bump in the road.  The Institute for Supply Management’s NonManufacturing index dropped in February and the details were disappointing as well.  While demand continued to improve, it did so at a much slower pace.  Inventories built rapidly, but they are viewed as too high.  Finally, the cost of doing business is skyrocketing as prices paid jumped. 

IMPLICATIONS:It really looks like the economy is in very good shape.  Incomes are soaring as a consequence of the stimulus checks going out and most reports have manufacturing and construction going like gangbusters.  So, why did the February data released today raise some questions about conditions?  My guess is that is just a weather thing.  The polar vortex devastated that middle half of the country, freezing out business activity all the to the Gulf of Mexico.  Texas was a disaster.  But the cold has moved back up north and businesses are reopening and the repairing of the damage has begun.  That negative impacts were concentrated in the February data, but the recovery should show up in the March numbers so look for those to be really strong. But the warning is that the frigid weather could have led to layoffs and limited hiring, so Friday’s job gain may be less than hoped for.  The consensus is for something around 200,000 and that might turn out to be high.  But all that does, as just noted, is set us up for a sharp rebound in March, so don’t get worried if the headline number is disappointing.  More importantly, even with the clearly improving economic situation, another massive stimulus bill, with lots of free money for everyone, looks like it will be passed within the next two weeks.  That will add fuel to the slowly building fire and growth this year should be really strong.  Investors will likely spend the rest of the year battling over slowly rising inflation and interest rates versus robust growth.  As long as the Fed keeps downplaying the inflation risk, growth should retain the upper hand.