March Employment Numbers & Leading Indicators
The March 2007 Employment Numbers are in. Following are the results from the establishment survey.
In March, nonfarm payroll employment rose by 180,000 to 137.6 million, after seasonal adjustment. This increase followed gains of 162,000 in January and 113,000 in February (as revised). Over the year, total nonfarm employment rose by about 2.0 million. In March, construction employment rose sharply, following a large decline in the prior month. A sizable job gain also occurred in general merchandise stores in March, and job growth continued in health care and in food services. Manufacturing employment continued to trend down over the month.
Construction employment increased by 56,000 in March, mostly offsetting a decline of 61,000 in February. Unusually adverse weather likely contributed to February's decline. Overall, the construction industry has shown no net growth since employment peaked in September 2006. Over this span, job gains in the nonresidential components of construction have been more than offset by losses in the residential components.
Within retail trade, employment in general merchandise stores rose by 36,000 in March and by 81,000 in the first quarter of this year. Despite the recent growth, employment in general merchandise stores was little changed over the year.
Elsewhere in retail trade, employment in building material and garden supply stores has declined by 15,000 since reaching its peak in October 2006. Employment in health care continued to increase in March with a gain of 30,000; over the year, the industry added 348,000 jobs. In March, offices of physicians and hospitals added 9,000 jobs each, while nursing and residential care facilities added 7,000. Food services and drinking places also continued to add jobs in March (+19,000). Over the year, employment in the industry grew by 335,000.
Professional and business services employment was essentially unchanged in March and over the first quarter of 2007. The industry added half a million jobs in 2006. In March, employment continued to expand in computer systems design and in management and technical consulting services, but those job gains were offset by small job losses in accounting and bookkeeping and in employment services.
Manufacturing employment continued to trend down over the month (-16,000), with declines in furniture and related products (-4,000), computer and electronic products (-4,000), textile mills (-2,000), and paper and paper products (-2,000).
This is actually a pretty good set of numbers. Yes construction rebounded mightily but the birth death/model added 128,000 jobs as shown in the following table.
As shown above the Leisure and Hospitality birth/death adjustment added 39,000 jobs and construction added 27,000 jobs (together over half the total). If one is looking for negatives in this report in isolation it would be the Leisure and Hospitality adjustment. Those are low paying jobs in general.
If one accepts the BLS's report in aggregate, with the construction numbers swinging wildly based based on the weather, then I suppose one should average the last two months of data. The revised February total of 113,000 added to the March total of 180,000 yields a two month total of 293,000 (a monthly average of 146,500). January came in at 162,000. Given that we need to create 150,000 jobs a month to keep up with population growth and immigration we are right on the break even mark.
That is probably a realistic way of looking at it, and to be fair I am willing to assume those 128,000 jobs added by the birth/death model do indeed exist, but I am also smoothing to a 3 month average so to speak because of the weather (again doing nothing more than accepting the report in total). On that basis here is the bottom line: The jobs numbers are not fantastic but they certainly are not weak.
If instead one wishes to look at this month in isolation this was a good, but by no means excessively strong set of numbers.
The Bear Case
I was asked earlier on my blog "What does this do to the bear case?" My answer is not much. As stated above, this was a good but not fantastic set of numbers. But remember that 2.1 million households missed a mortgage payment in the last quarter of 2006. People are clearly struggling in spite of low unemployment rates.
Look at the jobs we are creating. Yes construction (higher paying jobs) rebounded but much of the real growth is in leisure and hospitality, which are very low paying jobs. But that is just the jobs picture. One must also look at jobs data in context of other data, not in isolation.
For the proper context one must consider Capital Spending Myth and Reality.
Business outlays for new equipment and facilities have slowed sharply over the past year. That's important because when businesses expand their operations they also add to their payrolls. Job growth over the past couple of years has been the primary support under consumer spending, so any sharp slowdown in capital spending would most likely have an even broader impact on consumers than the weakness in housing.
That was the lead paragraph on my recent blog on Capital Spending. One needs to look ahead to where the job growth will be coming from not only today but in the future. In context, those leisure and hospitality jobs added in March are likely the tail end of previous buildouts.
I have talked about this before but will bring it up again. There is simply no reason for businesses to expand in this environment. We do not need more cars, boats, nail salons, Pizza Huts, Walmarts, strip malls, Home Depots, etc etc etc. But given the lag between the slowdown in residential construction and commercial construction, in the context of falling capital spending, this is likely the last hurrah of hiring. Yes I have said this before but timing of this is next to impossible to call this on the nose. You either buy the theory or you do not.
The data in context says a slowdown is coming, even though jobs (a lagging indicator) in isolation may appear to indicate otherwise. In this case I would suggest paying attention to valid leading economic indicators. And as I have proven before in that link, the stock market is simply not a leading economic indicator in spite of what anyone says.
OECD Composite Indicators
The OECD released report on Composite Leading Indicators for Major OECD member countries on April 6, 2007.
The latest composite leading indicators (CLIs) suggest that some moderation in economic expansion lies ahead in the OECD area. February 2007 data show weakening performance in the CLI's six month rate of change in most of the Major Seven economies. The spreads between short and long-term interest rates are contributing negatively to the performance of the CLIs in all the Major Seven economies, while business confidence is contributing positively in these same countries except Germany. The latest data for major OECD non-member economies point to strong expansion in China, moderating expansion in India and Brazil, but a weakening outlook for Russia.
The CLI for the OECD area was unchanged in February 2007 at 109.5, but its six-month rate of change shows a downward trend since March 2006.
The CLI for the United States decreased by 0.3 point in February with its six-month rate of change showing a downward trend since March 2006. The Euro area's CLI was unchanged in February and its six-month rate of change has fallen since June 2006. In February 2007, the CLI for Japan fell by 0.1 point and its six-month rate of change has a downward trend since March 2006.
The CLI for the United Kingdom decreased by 0.1 point in February and its six-month rate of change shows a downward trend since May 2006. The CLI for Canada decreased by 0.3 point in February, and its six-month rate of change is also down over the last two months. For France the CLI rose by 0.2 point in February, but its six-month rate of change has a downward trend since December 2005. The CLI for Germany fell by 0.3 point in February and its six-month rate of change shows a downward trend since May 2006. For Italy the CLI decreased by 0.1 point in February and its six-month rate of change shows a downward trend since July 2006.
The CLI for China showed a strong 5.6 points rise in February 2007 and its six-month rate of change increased for the fifth consecutive month. The CLI for India remained unchanged in January 2007. Its six-month rate of change was down for the second month in a row. The CLI for Russia decreased by 0.1 point in February 2007, and its six-month rate of change shows a downward trend since April 2006. In February 2007, the CLI for Brazil decreased by 0.1 point and its six-month rate of change is also down over the last two months.
Outside of Asia the leading indicators are anemic. That ties in well with the capital spending slowdown in the US. Here is the key question: Can Asia/Emerging Markets alone carry growth forward?
Short term the answer is no. Long term we are all dead. So what happens in between? In between I am still sticking to the theory that while the influence of the US is waning, it is still the most important economic powerhouse in the world although China/India growth is arguably the most important factor at the margin. Right now the US is still the dog, and China is still the tail. That role may change in the future but much of what China/India produces now still depends on the US consumer.
With US consumers are struggling to pay the bills in an economic expansion , with capital spending is on the wane, with services and manufacturing ISM numbers weakening, with leading economic indicators slowing worldwide, and given that jobs are a lagging indicator, there is a huge disconnect between the stock market an reality. How long that disconnect lasts is anyone's guess but those playing for stock market advances in the face of this reality are playing the Greater Fool's Game just as they did with with housing in the summer of 2005. All I can say to that is Good Luck.