Kevin Spires, CFA, FRM
Initial Jobless claims dropped 10k to a Seasonally Adjusted 268k. The four week moving average continued to rise to 278.5k. The data is still being affected by the Verizon strike where New York workers have been able to file for unemployment benefits because Verizon has brought in replacement workers for striking workers. The next month should be interesting for jobless claims. Have we seen the bottom in claims for this cycle? Or is the recent bump up more a function of temporary factors. Stay tuned.
Kevin Spires, CFA, FRM Initial Jobless claims were released yesterday and there were 278k new jobless claims in the U.S. versus 294k the previous week. The four week moving average is now 275.75k jobless claims. Prior to the last 3 weeks, jobless claims were at their lowest levels since at least 1975. There is some noise in the past 3 weeks data with a Verizon strike probably adding some 10-20 in claims. Although jobless claims are still near their lowest in 40 years and have dropped by two thirds since the depths of the great recession, the four week moving average of jobless claims is now higher on a year over year basis for the first time since 2012. The increase in claims on a year over year basis will deserve our full attention - if it extends for another couple of weeks past the impact of the Verizon strike. Many employment indicators have weakened in 2016 and if initial claims start trending higher a greater sense of caution towards risk assets will become warranted.
Kevin Spires, CFA, FRM Last Friday's employment report was a bit disappointing with only 160k employees added in the U.S. versus an expectation of 200k. I believe the next few months are going to be as disappointing or worse. Almost every employment indicator I follow has degraded in the past few months - auguring the poorest job growth in the cycle is just ahead.
In summary, 3 indicators that I use to predict employment growth over the next 1-3 quarters have all turned negative in the past 3-4 months. While none of the indicators are currently at recessionary levels, further slippage without a quick recovery would put the current expansion at risk.
Kevin Spires, CFA, FRM This morning, the Department of Labor released the Initial Jobless Claims for the week ending December 4th. Initial Claims rose 13k to 282k week over week. The four week moving average increased by 1.5k to 270.5k. As can be seen above, the current level is barely above the recent lows - which are also below the lows reach in 1999 and 2005 for the past two expansions. The 4 week moving average in jobless claims is down 8.2% from its level 52 weeks ago. There is nothing in the Weekly Jobless Claims data that will stop Janet Yellen and the FOMC from raising rates next week.
Kevin Spires, CFA, FRM The Institute for Supply Management (ISM) releases a survey of Manufacturers and a survey of Non-Manufacturers each month. Widely followed, the ISM moves markets when the results are better or worse than expected. ![]() The Employment subcomponents of the two ISM surveys are a good predictor of the current employment picture across the whole economy. In particular, an average of the two surveys, weighted 80% towards the Non-Manufacturing Survey and 20% towards the Manufacturing Survey is an excellent predictor of current employment growth. Given the current level of this indicator, I would expect about .20% Quarterly employment growth which equals about 75k -100k payroll jobs growth a month. The ISM Employment sub-components are showing tepid growth in jobs - which has lined up fairly well with actual employment growth the past few months. Kevin Spires, CFA, FRM The ADP Employment report showed a gain of 162k Private Sector Jobs in September versus a revised gain of 189k in August. ![]() While many public commentators have been trying to dismiss the strength in the ADP report by saying it has overestimated the Jobs Report payroll number by 60k+ the past few months, the ADP report, in my opinion is a better count of payrolls than the first estimate released by the government. As we learned last week, the initial government count is an estimate that is based off of a survey of thousands of individual businesses. (Full disclosure: my wife's small business is a survey respondent) Each individual business inputs there payroll numbers each month and the government then estimates the economy wide payroll totals. At the end of each year, the government recompiles payroll counts from the state withholding data. For last year, the government undercounted jobs by 360k - or by 30k a month. The government puts a confidence interval of about +/- 100k on their monthly payroll count, so the actual job count could fall in a very wide range. ADP, on the other hand, has an actual count of checks cut through their systems which allows them to then estimate the economy wide private payroll count. In real time, the ADP count is just better. It is not as choppy and it still has a incredible correlation to actual payrolls into and out of recesssions. Given the ADP count of 162k, I would expect the governmet to estimate 150k-200k total jobs added in September in this Friday's jobs report. Kevin Spires, CFA, FRM The Federal Reserve just released the results of its quarterly Senior Loan Office Survey(SLOS). The results show continued easing of credit conditions across the vast majority of Real Estate, Commercial and Industrial Loans (C&I), and Consumer Loans. Demand continues to be strong across most categories as well. ![]() The SLOS is a great predictor of C&I loans. The SLOS conditions for medium and small business loans leads C&I loan growth by 4-6 quarters. Loan conditions have been easy enough to support 10-15% loan growth since the summer of 2010. Conditions will continue to support credit creation over the next 4-6 quarters. There is no evidence of a credit crunch in the SLOS data. One interesting tid bit is that the FOMC had the SLOS data in hand for their last Open Market Committee meeting last week. It is very difficult to argue for QE3 when credit conditions are this supportive of credit creation. The recent acceleration in Money Supply and Bank Credit should continue based on the Senior Loan Officer Survey. This data alone should have been enough to stop the Fed from embarking on further Quantitative Easing. It may be a bit premature to call Mission Accomplished, but the way I read the data, the Fed should be moving towards a normalized policy stance, not trying to ease further. Talk of a recession is fanciful and I think by year end, the chatter will move back towards the timing of the next Fed tightening and QE3 will have a stake put Kevin Spires, CFA, FRM ![]() The ADP Employment report was released earlier this morning and according to ADP, 163k private sector jobs were added in July versus 172k jobs added in June. The ADP report is the single best predictor of the number of jobs to be reported by the government on Friday with a 92.5% correlation over the past 10 years. The main difference between the Jobs Report released by the government and the report released by ADP is the additional count of government jobs by the government. I strongly believe that the ADP report is a better report. Their number is based on a count of actual payroll jobs that are processed through their system. The government report is based initially on a survey that requires thousands of employers to self report their payroll numbers. (Disclosure: My wife's small business is a payroll survey respondent). The government slowly revises the payroll count as it receives actual payroll tax data and it's count becomes better, but only with long lags. Based on the ADP report, I would expect 150-175k total additions to payrolls to be reported by the Jobs Report on Friday, but anything 100k either side of that range shouldn't be a surprise. The seasonals seem to be favoring greater job growth, with fewer auto manufacturing layoffs, but you can never discount the effect that the European Crisis and the looming fiscal cliff might have had on Kevin Spires, CFA, FRM ![]() Initial jobless claims were 353k for the week ending July 20th down from an upwardly revised 388k last week. The four week moving average dropped to 367k, very near to a cycle low. Initial claims have been marred by seasonal adjustment issues for the past 4-5 months. There was been a second quarter bump in claims that many believe was due to seasonal adjustment issues and now the current claims are tainted by the lack of normal layoffs in the auto industry. I have been looking at the 13 week moving average versus the 13 week moving average 52 weeks ago. Claims on this basis are down over 11% versus last year - and have been down over 10% on this basis for over a month. In general, this is not a "slowly" improving job market, but a steadily improving job market that has the potential to produce some very strong employment growth if the trend continues. Kevin Spires, CFA, FRM It is stories like this - "Tennessee Tax Revenues Soar above Estimates" (Hat tip to Glenn Reynolds at Instapundit.com) - that remind me that State & Local Government Tax Revenues have been growing at a moderate pace of 3-4% for the past year. ![]() Revenue growth is followed by employment growth by 4-5 quarters and it is reasonable to expect that State & Local Government employment growth will resume in the next few quarters. While the response of government employment to economic growth has been muted this cycle due to the buildup of excess employees during the Housing Bubble, the excesses appear to have been purged and continued economic growth will lead to an increase in government payrolls. |
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