December 4, 2019

.As shown above the ADP survey shows an impressive correlation with the private sector portion of the payroll employment data to be released a couple of days later.  And well it should.  ADP, or Automatic Data Processing, Inc. is a provider of payroll-related services. Currently, ADP processes over 500,000 payrolls, for approximately 430,000 separate business entities, covering over 23 million employees.  The survey has been in existence since January 2001, and its average error has been 65 thousand.  So while it is not perfect, it does have a respectable track record.

The ADP survey said that employment rose 67 thousand in November after having risen 121 thousand in October.  In the most recent 3-month period ADP employment has risen 104 thousand.   On Friday we expect the BLS to report that private sector employment rose  about 150 thousand in November.  But keep in mind that about 48 thousand G.M. workers were on strike in October but returned to work in November and we should see a relatively robust reading.  Prior to the release of the ADP report we expected an increase of 175 thousand in November, but we have toned it down somewhat because of the respect we have for the ADP report.  Every month there are differences between the two reports, but a  reported 67 thousand increase is considerably smaller than anticipated .  But keep in mind that the labor force is rising by only about 100 thousand per month.  So while the employment gains are slowing the pace of employment continues to outpace growth in the labor force which means that the unemployment rate will continue to decline slowly and it is already at a 50-year low.  While  the monthly job gains have gotten smaller than the  220 thousand per month average increase last  year that is largely because workers are so hard to find.  The only sector of the economy that is weak is the manufacturing sector where exports orders have plunged..

Jobs in goods-producing industries  fell 18 thousand in November after having fallen 13 thousand in October   —  construction employment declined 6 thousand, mining fell by 6 thousand,  and manufacturing contracted by 6 thousand.   Service providers boosted payrolls by 85 thousand in November after have produced 135 thousand jobs in October The November increase was led by an increase of 28 thousand in business and professional services,  36 thousand in health care,  7 thousand in administration and support, an increase of 3 thousand in education, an increase of 19 thousand jobs in leisure and hospitality, an decline of 15 thousand in trade, transportation, and utility workers, and a 11 thousand increase in financial services.  What reallly stands out about these categories is the trade category.  In each of the previous three months this category rose of 20, 20 and 25 thousand only to decline 15 thousand in November.  This smells like smaller-than-normal Christmas hiring at brick and mortar retail shops.  Given the competition from on-line stores perhaps this is not so surprising;  But if that is the case there will be fewer layoffs in January than normal and we will see a larger than expected increase in that month.

With the labor force rising very slowly by about 100 thousand per month and employment gains of 140 thousand, the unemployment rate will continue to decline slowly.  The unemployment rate currently is at 3.6% which is a 50-year low and well below the full employment threshold.  As a result we continue to see shortages of available workers in most industries.  The tightness of the labor market is finally putting upward pressure on wages which in the past year have risen 4.5%.  Productivity has climbed by 1.4% which means that unit labor costs, or labor costs adjusted for the increase in productivity, have risen 3.1%.  The Fed’s inflation target is 2.0%.  Thus, the tightness in the labor market is finally putting upward pressure on the inflation rate.

Thee S&P 500 index is close to a record high level..   Meanwhile, interest rates are extremely low.  Consumers remain confident.  Corporate earnings are solid.  Thus, our conclusion is that the economy will expand by  2.4% in both 2019 and 2020 after having risen 2.5% last year.  Still steady growth despite a long laundry list of potential worries.

Stephen Slifer


Charleston, SC