Private sector job creation was still solid. I think growth is slowing based on other factors and I’m bearish stocks in the intermediate term. This report actually counters my thesis even though traders acted like it was a disastrous report, says Don Kaufman Saturday.

The November ADP report beat estimates, while the BLS report missed them. The ADP private sector jobs report showed 179,000 jobs were created which beat the consensus for 175,000, but fell from the prior month’s growth of 225,000 jobs.

Mid-sized businesses dominated job creation as they added 119,00 jobs. Small firms added 46,000 and large firms added 13,000 jobs. Very small firms only added 13,000 jobs, while other small firms added 33,000 jobs.

This report was the weakest since August 2018 when 162,000 jobs were added. Services dominated as it added 163,000 jobs. Goods producing firms only added 16,000 jobs.
Construction added 10,000 jobs; it is facing a labor shortage. The professional & business and education & health industries were the strongest segments as they added 59,000 and 49,000 jobs.

Weaker than expected BLS report

The BLS report showed there were 155,000 jobs created in November as you can see from the chart below. This missed estimates for 190,000. It just beat the low end of the estimate range which was 150,000.

This was a somewhat weak report when you consider the fact that the October report was revised down 13,000 to 237,000 jobs and the September report was only revised 1,000 higher to 119,000. As you can see, both the 3-month and the 12-month averages fell.

The average payroll growth in 2018 is still 206,000 per month which is above the past 2 years. I don’t think it makes sense to overreact to one month of data.

The red bars show there have been a few months in this expansion where growth was under 100,000 jobs. The stock market sold off in reaction to this report because it has been worried about an economic slowdown, the hawkish Fed, and the trade war.

It’s tough to please the stock market now. The headline miss made traders think the economy is weak. If job creation beat estimates and hourly earnings growth was strong, traders would think the economy is overheating.

This is the 98th straight month of job creation. The previous record long streak was only 48 months. In June 2019, this will be the longest expansion since the 1800s.

Low unemployment rate & negative ECRI reading

The unemployment rate was 3.7% which met estimates and last month’s rate. However, if you look at the data that’s not rounded, the rate of 3.671% is the lowest since December 1969.

A low unemployment rate is bad for the stock market because it means the cycle is almost over. I still think the expansion will get past the June 2019 goalpost, but the yield curve almost inverting and the negative ECRI leading index makes me concerned about a 2020 recession.

As you can see from the chart below, the ECRI leading index is down 4.1% year over year which is a 144-week low. It is very close to being down more than the 2016 slowdown. The hard data is delayed, so it still shows the weakness isn’t as bad as 2016. If this leading indicator is correct, we will see a few more months of weak hard data such as industrial production.

As I mentioned, a low unemployment rate is bad. It’s tough to come up with historical returns when the rate is this low because it hasn’t been this low many times. The data set would be too small.

herefore, we have the table below which shows returns when the unemployment rate is in between 2.5% and 4.4%.

As you can see, it pairs the unemployment rate with the Shiller PE ratio to come up with projections for forward S&P 500 (SPX) returns.

The worst category of returns is when the CAPE is high and the unemployment rate is low. When the CAPE is above 25 and the unemployment rate is in between 2.5% and 4.4%, annualized 2-year returns are -9.8%. That is the equivalent of a bear market. The final piece of this puzzle is momentum.

Year over year unemployment rate still falling

If the unemployment rate and valuations are getting more expensive, momentum can carry stocks higher for a few months longer. The year over year change in the unemployment rate is -9.8% which means the economy is still improving.

Since the initial recovery period, the highest this year over year growth rate got was flat in September 2016. The unemployment rate is more likely to turn higher when it’s low.

In the last cycle, the unemployment rate started increasing year over year in September 2007 which was 3 months before the recession started. In the 1990s cycle, the unemployment rate growth went positive 2 months before the 2001 recession.

Manufacturing job creation beats estimates

The private payrolls numbers weren’t as bad as the overall numbers. There were 161,000 private sector jobs created which missed estimates for 183,000. That’s a miss of 22,000 instead of a miss of 35,000. This result was only 18,000 below the ADP report. That’s not terrible accuracy given the size of the labor market. Private sector job creation was revised 5,000 higher to 251,000 in October.
Manufacturing job creation was 27,000 which beat estimates for 16,000 and the highest estimate in the range which was 25,000.

Job creation in October was revised from 32,000 to 26,000. The White House highlighted manufacturing job creation since it was the bright spot of this report. Ultimately, this report is similar to many others in this cycle. The stock market fell because of negative sentiment surrounding other issues.


It’s never ideal for job creation to miss estimates. Because the stock market sentiment is terrible, basically every news item that comes out is treated like a disaster even if it isn’t bad.

The labor market is nearing full employment which is historically bad for stocks. However, this report shouldn’t justify bearishness as private sector job creation was still solid.

I think growth is slowing based on other factors and I’m bearish on stocks in the intermediate term. However, this report actually counters my thesis even though traders acted like it was a disastrous report.  

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