Wednesday, April 3, 2013
It will be interesting to see if this morning’s lower than expected labor market reading will make investors recalibrate their bullish bets on the economy. It may or may not be the start of another 'Spring Swoon' for the U.S. economy, but it nevertheless represents downside risks to expectations for Friday’s March non-farm payroll report from the Bureau of Labor Statistics (:BLS).
The March jobs tally from Automatic Data Processing (ADP) came in weaker than expected this morning – up +158K vs. consensus of +192K. The February tally was revised higher by +39K to 237K. This report is expected to serve as a preview of the non-farm payroll report from the government’s BLS coming out on Friday. The consensus expectation is for ‘headline’ BLS gains of +200K. The ADP report means that expectations for the Friday number may need to come down.
The loss of momentum in the ADP report should be worrying, with the swing in the construction sector particularly notable. The construction sector didn’t add any jobs in March after strong gains in the preceding months. As a result, the goods producing side of the economy, particularly for medium sized employers, had a weaker showing than what we had become accustomed to in the last few months.
Small businesses, with employers having less than 50 employees, added +74K jobs in March. Medium sized businesses (less than 500 employees) added +37K jobs in March, roughly half the pace of February. Large businesses (1000+ employees) added +47K jobs in March. The goods producing sectors added +7K jobs in March, substantially lower than the last few months, while the services-providing sector’s tally of +151K jobs in the month was not substantially different from sector’s recent pace.
The weaker looking ADP report will likely cause analysts to bring down their estimates for Friday’s BLS report. The consensus expectation ahead of the BLS report was for ‘headline’ gains of about +200K, which appears on the high side post-ADP. A more reasonable level for Friday, post-ADP, should be around +150K, since the government sector likely lost 5K to 10K jobs during the month.
The ‘softish’ ADP read after the ‘weak’ manufacturing ISM report earlier this week may prompt some to start suspecting the onset of another ‘Spring Swoon’. Estimates for first quarter GDP have been steadily moving above the +3% mark, with some analysts looking towards a +4% read. But the first quarter strength may be nothing more than just a reversal of the unusual weakness in the preceding quarter and the impact of the tax hikes and the sequester starting to show up in economic data finally. It is perhaps premature to start fearing a fresh ‘Spring Swoon’, but the fear is not entirely unfounded given our prior history.
Where does it leave the market, which is already in record territory? More economic data in the coming in the coming weeks will clarify the picture. But we have the earnings season to guide us before that. This morning’s negative earnings surprises from ConAgra (CAG), Global Payments (GPN) and earlier reports from Oracle (ORCL) and FedEx (FDX) don’t inspire much confidence on the earnings front, but this is just a start. If companies can reassure on the earnings front and economic data doesn’t point towards a fresh ‘Spring Swoon’, then the rally may have some life left in it, otherwise not.
Director of Research