Monthly Archives: October 2012

The Submariner — Deep Data Dive: September Jobs Report

Fri, OCT 5th, 2012

The scorecard is in, and the September employment climate is, well, mixed. Gasp! We know, you’re shocked. When the economy is below trend and the policy environment is uncertain, jobs should be growing on trees, right?

All funnies aside, the BLS Non-Farm Payroll [NFP] release was a wonks playground. Lots of numerical crosscurrents, reconciliations and analytical interpretations to feast on.

Without any further ado, let us get right into the gut of the report.

+114K gain in September [vs. +115K expected]

Private payrolls +104K [vs. consensus of +130K]

7.8% unemployment rate [lowest rate since January 2009] vs. 8.1% expected [unchanged]

August payrolls revised up to +142K [vs. initially reported +96K]; July was revised up to +181K [vs. initially reported +141K]

This brings the average NFP number from January through August of this year to about +146K/month, which is consistent with the 350-380K initial claims range over the same period.

These hard-to-reconcile figures — a meaningful drop in the jobless rate even though job growth was relatively weak and the labor force expanded — appear to be, at least partly, explained by a sharp increase in the number of Americans who found part-time jobs and “counted” themselves as employed in the survey.

Understanding this, it’s important to know that payroll numbers and unemployment figures are obtained by separate surveys thus they sometimes diverge in the short-run, but generally move in the same direction typically converging over the long-run. The unemployment rate is obtained by a survey of households, which tends to have elevated variability because of a smaller sample size. Conversely, the NFP number is a survey of business payrolls. In many prior months, positive changes in the rate have, to some degree, reflected people dropping out of the work force. That wasn’t the case in September [the participation rate actually ticked up +418K]. What drove the unemployment rate down was the +873K reading in this household survey and the corresponding drop in those “unemployed” in the survey.

Average earnings rose by seven cents to $23.58/hour, while the average workweek edged up +0.1 hours to 34.5 hours.

Remember though, as Matt Yglesias of Slate reminds us [paraphrasing here].

As the recent BLS re-baselining exercise that discovered almost +386K “missing” jobs was a reminder that the market [and the financial press] pays too much attention to this monthly data. It’s based on a statistical sampling with a large margin of error [+/- 100K jobs in the NFP survey; +/- 285K in the household survey]. It gets revised twice through this sampling data. It is then subject to further revisions as per this re-baselining mechanism. To be sure, a strong number in real-time is better than a weak number, but there isn’t a ton that can be inferred from monthly fluctuations until they’re well in the past and we have more accurate data.

To bottom-line this: if you choose one number to focus on, let it be the NFP net payroll additions. If you wish to get a bit more wonkish, pay most attention to the private payroll additions. And if you are bold enough to dig deeper than that, choose an antacid.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200

The Submariner — Deep Data Dive: September ISM

Mon, OCT 1st, 2012

Today’s ISM gave a real boost to equity prices. Given the expectations of continued contraction, last week the market built pressure on the short-side. When the official number hit the tape this morning the shorts got nervous and covered, hence the concerted move up.

Why did the shorts freak?

For the first time since May, the ISM showed manufacturing expansion. Moreover, the most encouraging signpost from the report: new orders led the way in the sub-indices, rising to 52.3 from 47.1 last month. This is a big M/M move. Another positive read came from the employment sub-component, which clocked-in at 54.7 up +3.1 points from August. Another big move. This employment trend continues to grow [36 straight months now of employment expansion in this report] underneath the surface of the headline number and may even be picking up some steam.

Digging deeper into the report reveals that the surge in new orders breaks down like this:

“The eight industries reporting growth in new orders in September — listed in order — are: Petroleum & Coal Products; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Paper Products; Plastics & Rubber Products; Primary Metals; and Fabricated Metal Products. The six industries reporting a decrease in new orders during September — listed in order — are: Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Machinery; Miscellaneous Manufacturing; and Wood Products.”

Also worth noting – in fact one of our favorite elements of the ISM – are the specific comments from purchasing managers in the survey.

• “Appears that our so-called ‘slowdown’ was a summer thing. September brings with it increasing requirements and business.” (Paper Products)

• “Business improved through Q3, but is beginning to show signs of slowing down in Q4; this has been a typical trend over the last few years.” (Wood Products)

• “Business has picked up going into the last quarter.” (Plastics & Rubber Products)

• “We are sticking to our manufacturing plan, but have slowed production down considerably. Haven’t added any new units to the 2012 plan, and still have no forecast for 2013 released.” (Computer & Electronic Products)

• “Sales have tanked over the last two months, bringing a very concerned and stressed management team. Not very optimistic for the near-term future.” (Apparel, Leather & Allied Products)

• “Uncertainty in the healthcare legislation (reform) continues to be the underlying force keeping our sales revenue below its full potential.” (Miscellaneous Manufacturing)

• “Steel and aluminum prices still dropping, and auto production orders are up.” (Transportation Equipment)

• “Domestic business is up; international is down.” (Electrical Equipment, Appliances & Components)

• “Demand seems to have stabilized from August. New orders are appearing this month without advanced notice from our customers.” (Chemical Products)

Prices paid also rose in September, and at a faster rate vs. August. This is bad for corporate margins, now at 60-year highs. Recall that we have been cautious toward corporate margins for the better part of this year, especially in the last couple of months. Add to this the continued pick-up in the employment sub-index and you have a recipe for unit cost inflation. If sales growth doesn’t accelerate, profit margins will likely take a step back, which may lead to a slight [Y/Y] EPS decline in Q3.

Bottom line. The read-thru for the broad economy, particularly manufacturing, in this report is positive. At the business level, however, it demonstrates the challenges ahead for maintaining profit growth.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200