The unexpected 224,000 increase in US payroll employment reported last Friday by the Bureau of Labor Statistics stood out against a wave of depressing economic data, and provoked a bounce in US bond yields from a three-year low. Viewed in context, though, last week’s employment data tells the same story as all the other economic reports of the past month: The US economy is slowing sharply. This is not an encouraging environment for US equities.
Markets were rattled by a payrolls gain of just 72,000 in May. The monthly data, though, are so noisy as to be unreliable as an indication of economic trends.
The three-month moving average contains much more information. There are two major surveys of payroll employment, the official count by the Bureau of Labor Statistics and a private estimate by Automatic Data Processing (ADP), which manages payrolls for a representative sample of US employers. Although the monthly reports from the BLS and ADP often look very different, their respective three-month moving averages have tracked closely for the past several years.
What the three-month moving average shows is a rate of employment growth that has fallen back to the low levels of the Obama years (about a 1.2% annual gain in hiring).
While the June BLS report was much higher than expected, the ADP June report was disappointing, showing a gain of just 102,000 jobs, far lower than expected. But ADP had reported a startling gain of 254,000 jobs in April, higher than the consensus estimates. Evidently, ADP picked up some hiring that the BLS did not count until June.
The sectors of the economy that are most sensitive to changes in demand – leisure, construction, retail and manufacturing – show virtually no growth during the past three months (and in the case of retail a small decline). The least economically sensitive sectors – health care and education – continue to grow at a steady pace.
The deteriorating economic outlook does not augur well for equity markets. Morgan Stanley’s global strategist Andrew Sheets warned of poor stock market performance in a note to clients last week:
Our concern is that the positives of easier [monetary] policy will be offset by the negatives of weaker growth: We think a repeated lesson for stocks over the last 30 years has been that when easier policy collides with weaker growth, the latter usually matters more for returns. Easing has worked best when accompanied by improving data…
As markets have rallied over the last month, global trade and PMI data have continued to worsen. Global inflation expectations, commodity prices and long-end yields suggest little optimism about a growth recovery. On the back of the G20, our economists downgraded their global growth forecasts. We forecast an aggressive Fed and ECB action because we think growth concerns are material.