US Perspectives: Don't Be Faked-Out by Jobs and Sales Data

Though they disappointed, results aren't quite as bad as they look.

Robert Johnson, CFA 11.01.2011
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Just when everyone had decided the economy was ready to boom again, employment data disappointed and retail sales were at least modestly slowed by a major snowstorm the day after Christmas. I'm not sure the results are quite as bad as they look, but they're enough for me to temper my short-term giddiness ever-so slightly. Jobs managed to grow by just 103,000--barely above the 94,000 average of the past year--instead of accelerating as I had expected. October and November were revised upwards, but not quite as much as I forecasted.


Data from the International Council of Shopping Centers showed December growth of 3.1% versus my hope of 3.5% to 4%. Neither data point was catastrophic, so there's no need to panic. Both data points were likely affected by seasonal patterns that were more exaggerated than usual.


Offsetting the negative news was a stronger-than-expected manufacturing sector, auto sales that were wildly better than the consensus estimates, and a report on the service sector that suggested acceleration. I was particularly glad to see the ISM nonmanufacturing index jump to 57.1% from 55.0% for December, as the service sector has held back economic growth thus far in the recovery.


There was even a silver lining in the employment report: The psychologically important unemployment rate dropped to 9.4% from 9.8%, a 19-month low.


Number of Jobs Created Disappoints, but Unemployment Rate Better Than Expected

Last week's video report provides a full summary of the fairly disappointing December employment report. Jobs grew by just 103,000, which isn't much better than the full-year average of 94,000 jobs. Expectations had been for job growth of 150,000 or more, based on sharply improving weekly initial claims data and a much more positive report from payroll provider ADP earlier in the week.


The two prior months were revised upward, taking away some of the sting of this month's disappointment. Using a different survey (the one that questions individual households), the unemployment rate dropped a surprising 0.4 percentage points, to 9.8%. About half the improvement was from job growth (job growth in this survey was almost three times greater than the growth shown in the establishment survey) and half the improvement was from people leaving the workforce.


On average, I estimate that the economy needs to add between 50,000 and 75,000 jobs a month just to keep up with the average working-age population (age 21 to 62). If older workers stay on the job longer to make up for the loss of savings, that number could go even higher.


Not Much Help from Hours Worked or Average Hourly Wage

Two other key metrics, hours worked (up to 34.6 from 34.5) and average hourly wages (to $19.21 from $19.19) managed some improvement, but were just shy of expectations (using production, nonsupervisory data). We have now recovered about 1.1 million of the 8 million-plus jobs lost during the recession.


If hours worked had remained constant (companies had hired workers instead of working current employees harder), the economy could have added an estimated 1.9 million new jobs over roughly the same time frame. While the weekly wage increased by 0.1%, I believe that inflation grew by a substantially higher amount, negating the hourly wage gain, and then some. This is a red flag that I will be watching closely in coming months.


Still Expecting Accelerating GDP Growth

I still believe that inflation-adjusted GDP growth will accelerate from the third quarter's 2.6% to 3.0%-3.5% during the fourth quarter, a little slower than my previous forecast of 3.5% to 4.0%. The softer employment report suggests that more of the holiday shopping spree was fueled by a decline in savings than I previously anticipated. It is important not to get too wrapped up in one month's worth of employment data. Other reports, including the ADP employment report, initial unemployment claims data, and the Challenger Gray & Christmas Lay-Offs Report, suggest that recent employment gains for the Bureau of Labor Statistics may be understated. Major benchmark revisions for the official BLS are due with next month's report.


ISM Index Impresses in December

The week kicked off on a strong note, as the ISM purchasing managers report indicated that the manufacturing sector is coming out of this summer's slump. Eric Landry, head of our industrials team, summed up the report as follows:


The Institute for Supply Management's PMI Index came in at 57 for December, not far from what most expected. However, many of the subsectors we look to for forward indications perked up markedly from November. The new orders segment was the second-best performer, with a 4.3-percentage-point increase, to 60.9. With what appears to be a strong bounce under way, we're happy to admit our pessimism of the past few months looks increasingly unwarranted. Another segment with leading characteristics, production, increased an impressive 5.7 points to 60.7. Other than inventories, customers' inventories (a separate category) was the only other segment to decline more than 3 points, with a 5.5-point decline to 40.5. The reading indicates purchasing managers' belief that customers' inventories remain extremely lean. This report, combined with several highly positive regional reports, indicates that the manufacturing sector is regaining some of the momentum it lost during the late summer and fall. As a result, we're reasonably optimistic that continued mid- to high-single-digit annual growth in industrial production remains the most likely scenario for 2011.


Looking at manufacturing data from around the world, purchasing manager data for Europe was exceptionally strong. Data for China showed some deceleration in growth from the previous month, but was still a decent number in my opinion.


Retail Sales: Best Gains in Luxury Goods, but Electronics Suffer

Same-store sales growth of 3.1%, as reported by the International Council of Shopping Centers, came in light compared to the Council's expectation of 3.5% to 4.0%. Luxury goods purveyors such as Saks, Nordstrom, and Abercrombie did exceptionally well, while those serving the lower end of the market, like Gap, TJX, and Target all showed lower rates of growth.


Traffic at stores was up dramatically, but consumers weren't buying unless significant discounts were offered. Electronics sales, especially TVs, harmed results as 3D TV sales failed to catch fire, while low-end TVs suffered from overexposure, as even convenience stores offered digital TVs.


Snowstorms in the Northeast certainly didn't help sales during the critical post-Christmas shopping season, either. When looking at October, November, and December in aggregate, sales grew at about 3.5% per month on average, a modest improvement from the 3% gains that characterized most of the rest of 2010. I should also note that auto sales were particularly strong in December, which often means that consumers don't have the time or the money to shop for other retail goods.


December Light-Vehicle Sales Were Outstanding

Auto sales were also surprisingly strong as summarized by Morningstar's auto analyst, David Whiston:


Automakers reported December new U.S. light-vehicle sales on Tuesday that were the best monthly results of 2010. Total sales were 1,144,840, an 11% increase from December 2009 and a seasonally adjusted annual rate of 12.6 million. Full-year sales also finished up 11% at just under 11.6 million units. We expected a good December since the retail channel picked up in October, and December's results showed improvement both in the commercial fleet and retail channel. Rental fleet sales took large hits, which the automakers expected and are a good thing since rental sales are the least profitable fleet business. We are encouraged to hear General Motors and Ford mention increases in commercial fleet business (GM's was up for the ninth straight month), since this is an indicator of improving small-business health.


We look for 2011 sales of 13 million units but would not be surprised if the monthly SAAR statistics come in above 13 million later this year. Although housing and unemployment are reasons to be bearish on auto sales, we continue to believe auto industry critics are wrong. We estimate replacement demand alone to be more than 13 million units, credit availability is improved, and the vehicle fleet is now one of the oldest in decades. The Manheim Used Vehicle Value Index hit another record high in November. We think these highs are not sustainable because eventually consumers do not see used vehicles as much of a value compared with new ones.


Data on Prices, Retail Sales and Balance of Trade Due This Week

The most important and hardest to predict item this week is the trade balance. It's been jumping around like crazy this year, wreaking havoc on GDP calculations. The consensus forecast is for the trade deficit to increase to $41 billion, up from October's stunningly good level of $38.7 billion. This would still be way short of both the devastating $50 billion increase for June and the $63 billion peak in 2008, but off its best level at the bottom of the recession when it reached the mid-$20s of billions.


I am a little worried that the increase could be higher than the consensus forecast, given that at least some of the holiday goods that sold surprisingly well are imported. Strong export sales could also erase some of that import problem, but I would suspect that the real jump in exports will come in the last month of the quarter, namely December. Exports have been the second-leading growth factor for GDP growth in four of the last five quarters. Unfortunately imports have grown even faster, as they are prone to do in any economic recovery.


The consumer price index is due for a spike, as higher food and energy prices work their way through the supply chain. The consensus forecast is for the CPI to jump 0.4% (4.8% annualized in December). Unfortunately, that higher number will be enough to erode the meager 0.1% growth in the average hourly wage. Ex-food and energy, the CPI is slated to gain 0.1%. Growth in the producer price index is likely to jump even higher, perhaps as high as 0.8%, boding poorly for February results as well.


The most comprehensive measure of retail sales from the federal government's statistic mills is due on Friday, with the consensus expecting 0.8% growth, about the same as in November. Again that number looks a little high based on news out of the International Council of Shopping Centers and individual retailers, which seem to indicate that poor weather the last week of December slowed some the strong momentum going into Christmas day. Hopefully some of those sales will show up in January. Excluding the very strong auto sector, retail sales are expected to clock in at 0.6%.


Even as employment and retail sales weren't quite as robust as many of us had forecast, the manufacturing sector, as evidenced by the industrial production report, is likely to show a sharp acceleration from 0.4% in November to 0.9% in December. Strong numbers out of the ISM support that conclusion. 



This is an edited version. The article originated from Robert Johnson’s column at

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Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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