Four Out Of Ten Sectors Lose Jobs, ADP: Dec. 6, 2023

The labor market is continuing to ease with softness extending to the inflation-plagued travel and leisure category, according to this morning’s ADP payroll report, which is propelling equity prices higher and stabilizing bond yields. November’s results missed analysts’ expectations and marked the first time since the post-Covid-19 pandemic economic boom, or 33 months ago, that the travel and leisure sector, which is labor-intensive and an important driver of persistent services inflation, lost jobs. The data points to consumers no longer having the financial capacity to dine out or travel as often as they want as their spending clout has weakened following the resumption of student loan payments and households’ depletion of excess pandemic savings. It also signals that the Federal Reserve may have reached an important milestone in its inflation battle. While the news isn’t favorable for job seekers, it’s making investors giddy by increasing expectations of a 25-basis point (bp) Fed rate cut in March to 62%.

Help Wanted Signs Become Less Common

Employers slowed their hiring last month, with four out of ten sectors losing jobs. The private sector added 103,000 jobs in November, slowing from October’s gain of 113,000 and missing analysts’ expectations for 130,000. Excluding the most recent September, when only 89,000 jobs were added, November’s pace of job growth was the weakest since January 2021’s job losses.

Job growth had a non-cyclical tilt once again, as segments that are sensitive to economic conditions lagged. Without the 44,000 employee additions coming from the non-cyclical education and health services sector, job growth would have only totaled 59,000. The trade, transportation and utilities sector did lead, however, adding 55,000, while the following categories added the noted number of jobs:

• Other services, 15,000
• Financial activities, 11,000
• Natural resources and mining, 5,000
• Information, 4,000

The following sectors with the noted number of lost jobs experienced the largest declines in positions:

• Manufacturing, 15,000
• Leisure and hospitality, 7,000
• Professional and business services 5,000
• Construction, 4,000

Manufacturing and construction appear to be getting hit by the long and variable lags of monetary policy tightening while leisure and hospitality and professional and business services are subdued due to an exhausted consumer amidst slowing corporate investment. October served as an inflection point for consumer spending, as student loan repayments coincided with the end of excess savings from the pandemic coming off of a remarkable third quarter run for consumer spending. Similar to a blow-off top synonymous with an exhaustion phase to the upside in capital markets, I believe the consumer will indeed slow sharply into next year after saving the day this year.

Across establishment sizes, mid-sized companies (50-499 employees) led by adding 69,000 employees, while large companies (500 employees and more) and small companies (49 employees or less) added 33,000 and 6,000 jobs. Slower employment growth also coincided with softer wage pressures, with the year-over-year (y/y) gains in annual compensation weakening from 8.8% for job changers and 5.9% for job stayers to 8.4% and 5.7%, respectively.

Consumers Seek Bargains as Real Estate Industry Limps Along

Consumers’ spending crunch helped deep-discount retailer Ollie’s Bargain Outlet grow its third-quarter sales 14.8% y/y to $480.1 million as Americans increasingly sought to trim expenses by seeking lower cost products. The strong sales drove the company’s earnings up from $23.1 million, or $0.37 a share, to $31.8 million, or $0.51 a share y/y. Ollie’s Chief Executive John Swygert maintains that consumers are under pressure and are increasingly seeking ways to save money.

Homebuilders, meanwhile, are experiencing a mix of headwinds and tailwinds, with Toll Brothers reporting that the shortage of homes in the resale market supported demand for new homes during the company’s fiscal fourth quarter. Nevertheless, high mortgage rates caused the company’s quarterly home sales revenue of $2.95 billion to decline 18% y/y. The company’s earnings per share (EPS) of $4.11 fell 26% y/y, the first decline in more than two years. Toll Brothers is increasing homes available at lower price points and it expects lower mortgage rates next year to support demand.

Traders Continue to March Across the Monetary Policy Bridge

Asset prices are generally higher today as market players hope that the U.S. economy can cross the monetary policy bridge without notching a month of job losses. The monetary policy bridge begins when the fed funds rate peaks and ends when economic growth reaccelerates from positive territory during rate cuts. It is a particularly risky journey that could involve job losses amidst contractionary economic performance. At the moment, however, the journey appears to be going just fine, with consumer spending and job growth softening but still positive. Against the backdrop, all major U.S. equity indices are up. The small-cap Russell 2000 Index is leading with a 1.5% gain while the Dow Jones Industrial, S&P 500 and Nasdaq Composite indices are up 0.3%, 0.2% and 0.1%. Sectoral breadth is positive, with eight out of eleven sectors higher, led by industrials and real estate, which are up 0.9% and 0.8%. Meanwhile, consumer staples, energy and technology are down 0.5%, 0.4% and 0.1%. Bonds are near the flat line, with yields on the 2-year Treasury maturity up 1 basis point to 4.59% while the 10-year’s yield is down 5 bps to 4.12%. Yields on the longer-end are being pulled down by inflation expectations, which are slipping due to cratering crude oil prices amidst soft economic data. The shorter end isn’t moving as much because markets have already front run a large chunk of monetary policy easing. Crude oil is getting battered, declining 2%, or $1.50, to $70.51 per barrel as investors perceive that OPEC + production cuts aren’t enough to offset a gloomy demand outlook at the world’s largest oil importer, Beijing. Furthermore, U.S. supply has been particularly buoyant with crude production and exports soaring to a record high. The four-day losing streak in oil is incentivizing high-level discussions among political leaders in the East, with the helm of the Kremlin planning to visit heads of Dubai and Riyadh today: the officials appear willing to curtail production further. In currency land, the dollar is marching at the rhythm of the yield curve, it’s roughly unchanged, with the greenback gaining against the yuan, euro and yen but losing value relative to the pound sterling, franc and Canadian and Aussie dollars.

Moving Forward on the Bridge

Investors’ anticipation that the economy is moving across the bridge of monetary policy is likely to be influenced somewhat by tomorrow’s release of Unemployment Claims and to a heavier degree by this Friday’s Payroll Jobs. Further evidence of slowing labor conditions as depicted by yesterday’s Job Openings data and today’s ADP Jobs report is likely to support optimism that the Fed is inching closer to sustainably achieving its 2% inflation goal while the U.S. economy sports a positive growth rate. A severe slip, however, wouldn’t be welcome, as it would elevate the odds of potential job losses and recession prior to the Fed’s first cut. Stronger-than-expected strength, unfortunately, would dampen expectations that the Fed will cut in March. With those points in mind, the path for higher stock prices in the short term remains narrow, as too hot or too cold would likely spark volatility across asset classes as the S&P 500 struggles to conquer 4600.

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