Thursday, November 1, 2012
We have a flood of economic and earnings reports this morning, but the focus will be on the labor market today ahead of the October non-farm payroll report coming out tomorrow. This morning’s weekly Jobless Claims data is broadly in-line with expectations, while the private-sector jobs reading from payroll processor Automatic Data Processing (ADP) appears quite reassuring. But it may be advisable to be somewhat cautious in reading too much into this ADP report given changes this month to how the jobs number is put together.
The payroll processor partnered with Moody’s Analytics this time around instead of its usual partner Macroeconomic Advisors to calculate this number. Given the ADP report’s erratic performance lately in foretelling the government jobs number, the change of partner may actually be a good thing. But the change nevertheless raises questions about how comparable this month’s data is what came out in the past.
Jobs data aside, we also have the October manufacturing ISM survey coming out a little later, which is expected to show a modest decline from the preceding month’s level, but still remain in expansionary territory. Rounding out the day’s data deluge, we will see Construction Spending and Consumer Confidence data a little later. Overnight, we got China’s PMI data that shows improving momentum in that country’s factory sector.
The ADP report is showing modestly better-than-expected private-sector jobs of 158K in October, compared to gains of 114K in September and 88K in August. The biggest increase came from large businesses (firms with more than 500 employees), adding 81K jobs, while small businesses (under 50 employees) added 50K. Service sector jobs increased by 144K in October, while goods producing sectors added 14K. Importantly, the construction sector added jobs for the fifth straight month, adding 23K jobs in October, more than offsetting the 8K decline in manufacturing.
The expectation for Friday's BLS report ahead of this morning's ADP report was for headline gains of around 125K. But given the disconnect between the ADP and BLS readings in recent months and the methodology changes this month, it is unlikely that we will see any material revisions to those expectations following this release.
The key takeaway from this ADP report coupled with what we have been seeing in recent months is that the labor market is modestly improving at a pace somewhere in the 100K to 150K range. But this pace of improvement is just enough to keep the unemployment rate steady at current levels. For a significant drop in the unemployment rate, we need a much faster pace of job gains.
On the earnings front, Exxon (XOM) came ahead of expectations this morning, while Pfizer (PFE) matched earnings expectations but missed on the revenue line. As of this morning, we have third quarter results from 335 companies in the S&P 500 or 67% of the index’s total membership.
Total earnings for these 335 companies are down 1.7% from same period last year, with 61.8% of the companies beating earnings expectations. Total revenues for these companies are down 2.5% and only 36.1% of the companies could come ahead of revenue expectations.
Weak guidance for the fourth quarter and beyond has started bringing down earnings expectations going forward. The expected earnings growth rate in the fourth quarter, which was in excess of 7% just a few weeks back, has now come down to less than 3%. We are starting to downward revisions to next year’s estimate as well, but they still have plenty of room to fall. More than anything else, it is this downward adjustment to earnings expectations that has been weighing on the market in recent days.
Director of Research
Thursday, November 1, 2012