US Perspectives: Early Holiday Hiring Torpedoes Jobs Report

A wee bit more clarity on the Irish debt crisis aided market sentiment for the week as well. The national purchasing manager report for the services sector also turned in one of its best performances of the recovery, with its employment index showing particular strength. Softness in the services sector had held back the recovery in earlier months of this year.

Overall, the economic data for the week was good, though I caution that some of the data was not as positive as it looked on the surface (manufacturing purchasing managers' report, retail sales) and some was not as gloomy as a first read might indicate (employment).

Employment Growth Still Likely to Accelerate Despite Gloomy Report

The bottom-line conclusion I draw from the employment report is that employment has grown steadily (albeit at a painfully slow pace) all year, neither accelerating or decelerating much overall, despite a lot of month-to-month volatility. Better claims data in recent weeks, improved consumer confidence (as measured by spending data and auto sales), and the beginning of a new budget cycle in January at many large firms should lead to a higher rate of employment growth in 2011, in my opinion.

Other data sources, including the purchasing managers' surveys (both manufacturing and services), improved initial unemployment claims, and a separate ADP payroll report, all suggest that the "official employment report" might prove to be too conservative, and the stage is set for a meaningful improvement in the jobs report for December.

Retail Hiring May Have Shifted from November to October, Skewing November Results

On the surface, the employment gain of just 50,000 private sector jobs in November was a disappointment, especially compared with the gains of 172,000 the prior month. Almost all the discouraging numbers came from the retail sector, which lost 28,000 jobs in November compared to expectations of gains of 40,000-50,000. Only the health-care/education sector and the business services sector (which includes temporary help) showed any meaningful gains. Most other sectors were essentially flat, as they have been for some time.

The relatively poor growth in many sectors may be at least partially due to the use of temporary help. Data for temporary help workers are not broken down by the sector that employs them. Hours worked and hourly wages--heretofore positive indicators--were essentially flat. That is not particularly unusual with a holiday-laden month and as bosses become stingy in the short run while they await new spending budgets for 2011. This phenomenon may weigh on hours and wages a bit in December as well.

I think the retail sales data for October wasn't as good as it looked and November wasn't nearly as bad as seemed. It looks as though retailers started the holiday season early by offering more sales and hiring more people earlier in the season, even as early as October. As our company contacts had been indicating, non-seasonally adjusted hiring in October was one of the better results of the last decade. On the other hand, the hiring in November was near the bottom of this decade's range as it appears that some of the hiring in October mitigated the need for huge hiring numbers in November.

Applying "typical" seasonal patterns to non-standard hiring practices severely complicates data interpretation. To gauge the magnitude of the seasonal adjustment factors, retailing shops shrunk by 28,000 in November, while actual, nonadjusted hiring jumped by over 300,000 people. My point is not that seasonal adjustment factors should be tossed overboard willy-nilly, but rather that the adjustment factors are so huge this time of the year that small errors in these seasonal factors (or a nonstandard season) can overwhelm small changes in the real-world data.

The good news is retail hiring is substantially improved over both 2008 and 2009 when combining both October and November employment figures (not seasonally adjusted). However, the retail sector is still operating well below peak levels.

November Retail Sales Turn in a Stunning Performance, but Buyer Beware

Last week brought the comparable same-store sales reports for November, including Black Friday. Sales jumped more than 5.8% for all of November, the second-best performance of 2010 and well above the 2010 average of 3.4%. The improvement was broad-based, with more than three fourths of all stores reporting gains. Morningstar's retail team does caution that heavy discounting might be behind at least some of the stellar sales growth.

Though the retail sales report was great, I need to raise one point of caution. The holiday shopping season started early this year with a lot of pre-Black Friday sales. Strong early sales in November may eventually take some of the growth we would have otherwise seen in December. Just as early hiring aided October and killed November retail hiring, the same phenomenon could depress December sales. I would suggest that overall sales gains of 4% or slightly more for November and December combined might end up being the reality (and the full-year trend) rather than the wildly above-expectations rate of 5.8% reported for November alone. There is no need to panic when December's sales come in at a slower 3.0%-3.5% pace. I also caution that timing of the Halloween holiday may have shifted some sales out of October and into November.

Auto Sales Continue to Look Bright, Affirming Consumer Confidence

Another positive note on the consumer was the second month in a row of seasonally adjusted auto sales in excess of 12 million units. Other than one month during the Cash for Clunkers program, sales are now higher than at any time since mid-2008. Sales are now up substantially from their low of approximately 9 million units but well below peak levels of 15 million-17 million units. The 30%-plus increase in auto sales is probably one of the best indicators of renewed consumer confidence. These are big-ticket, long-term decisions that are not made on a whim.

Worldwide Manufacturing Data Holding Up Well

Manufacturing reports for November were strong throughout the world, including Europe, China, Brazil, and the United States. China's Purchasing Managers' Index (PMI) jumped to 55.2 from 54.7, its best performance in eight months. The United Kingdom registered a 58 on its PMI, its best performance since 1994 (no, that's not a typo). The eurozone overall showed a PMI jumping to 55.3 from 54.6 with particular strength in Germany, France, and Italy. Given the retail sales jump of 2.3% in Germany and over 5.8% in the U.S., a respectable manufacturing sector should not come as a complete surprise.

U.S. PMI Not as Good as It Looks

The U.S. version of the PMI was more difficult to interpret. The headline figure came in at 56.6, down just a tad from the 56.9 reading from a month earlier, despite expectations for a bigger decline based on some recent government statistics. Any reading above 50 indicates growth, and this month's reading is consistent with a 5% growth in overall GDP growth according to ISM, the official collector of the U.S. data. However, the most important parts of the index, new orders and production, both showed meaningful declines. Only a massive jump in lead times saved the overall index from a bigger decline. However, at this stage of the economic cycle, a slowing in manufacturing growth rates is no reason for panic.

Balance of Trade Could Be a Negative Surprise This Week

This week the only real economic report of consequence is the balance of trade report due on Friday. Consensus is expecting a small decline in the deficit as agricultural exports accelerate. However, given the recent large increases in consumer spending, much of which may turn out to be imports, the overall deficit and imports in particular could jump higher than current expectations.

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