First up: Deconstructing the jobs numbers
Well, we’re at that time of the month when we get the most important government statistics that traders look to for guidance on the health of the US economy: the monthly non-farm payroll report.
Wednesday’s ADP report shows slowing growth in payrolls of 154,000 vs 166,000 expected. That’s the slowest pace in six months. Unfortunately, 151,000 of all those jobs were in the service sector. I say “unfortunately” because those jobs are mostly low paying. The higher paying jobs in the goods-producing sectors lost 3,000 jobs. Manufacturing shed 6,000 jobs.
The unemployment rate will probably remain at 4.9%, but how accurate is that number? Let’s first take a look at how the government arrives at that number. First, it uses a method introduced in 1940 called the current population survey (CPS). This survey canvases 60,000 households (representing roughly 100,000 people) to see if they were working in the last month. (Maybe it’s just me, but 60,000 out of a population of 3.3 million people seems a bit low.)
This survey is conducted by phone using land lines only. There are two problems with this old and inaccurate method. First, 41% of Americans use only wireless phones. For millennials, it’s 82%. The other problem is the labor participation rate. That rate is currently at 62.6%. Many analysts believe the headline unemployment statistic is understated because of this. Adjusting for the distortions caused by the labor participation rate would add another 6.5 million to ranks of the unemployed, bringing the unemployment rate up to 6.3%
Long-term problems with retail sales
What the team at focusedstocktrader.com and I are concerned about is the downward trend in retail sales. My colleague Seth Golden notes in his institutional report that, besides the April 1.2% outlier, sales have been anything but inspiring.
September retail sales came in at a lackluster -0.3% month-to-month. And look no further than today’s guidance from Walmart (WMT), projecting a lackluster profit outlook into 2018. Even more troubling is the amount of big box stores closing hundreds of locations: Macy’s (M), Kmart, Sears (SHLD), and Walmart. Yes, people are using online shopping more and more, but the closing of so many stores tells us the consumer is starting to have a more difficult time—and maybe the jobs number Wall Street looks at is not showing us the real picture of Main Street.
And then there’s Hurricane Matthew
Hurricane Matthew is bearing down on Florida and the Southeast Coast of the US, and it has already caused death and destruction in the Caribbean. Traders are keeping a close eye on this major event. We are hoping everyone in the path of this category four hurricane heeds the advice of Florida Governor Rick Scott and evacuates the areas most likely to feel the impact of this killer.
Wall Street is also looking at the possible financial impact of the storm. Hurricane Katrina, which struck the Gulf Coast in 2005, cost the country $105 billion. Its biggest impact was felt in New Orleans. Hurricane Matthew has the potential to hit population centers from Miami up the coast to South Carolina. If Matthew remains a category four and travels up the East Coast, some analysts predict it could be a $200 billion event.
This could deliver a blow to the bottom line of insurance companies, banks (they have huge holdings in insurance companies), Disney World (DIS), cruise lines, airlines and others. On the up-side, companies such as Home Depot (HD), Lowe’s (LOW), and major construction companies could see a bump in this quarter’s numbers.
Of course, what matters most is life. President Barack Obama said it best, “You can rebuild homes, but you can’t rebuild a life. Stay safe.”