Conclusion: If there’s one thing we’ve learned from today’s Jobs Report, it is that consensus has to start accepting the fact that US growth is slowing and that forward EPS estimates need to come down. In the report below, we pick apart the BLS’s reported numbers and update our view of the US economy.
It’s obvious that today’s Employment data is not positive, so there’s really no need to belabor the point (no pun intended). Where we do find added value in writing about today’s awful Jobs Report is in breaking down the numbers to find out what’s really going on with the labor market – Hedgeye style.
At the start of the year, the biggest pushback we got to our incredibly contrarian call that Growth will Slow as Inflation Accelerates was that the consumer would roar back and join the manufacturing-led recovery. With the Unemployment Rate ticking back up above 9% in May, that storytelling is rightfully being revised. We said it then and we’ll continue to say it: arguing that the jobs picture would improve and help fuel the recovery was significantly more apropos in March ’09 than in January ’11. Employment is a lagging indicator.
There are three charts we want to show you below, but first, let’s define some methods and terminology.
- The first being the BLS’s Birth/Death Adjustment, which is the government’s way of estimating how many businesses are being created/shut down based on analysis of previous economic cycles;
- The second point we want to make is that the Birth/Death Adjustment is non-seasonally adjusted, so there is an omnipresent seasonal pattern to be recognized, with the peak positive adjustments typically coming in the three months of 2Q; and
- The third point we make is that the headline Payrolls numbers are seasonally adjusted, so netting out the government’s “fudge factor” is tougher than it appears to the naked eye. That said, while it may be akin to comparing apples vs. oranges, we find analytical respite in comparing the same faulty data series against itself on a year-over-year basis.
More information on the Birth/Death model and its methodology can be found here: http://www.bls.gov/web/empsit/cesbd.htm
Equipped with these caveats and idiosyncrasies, let us show you three charts that matter to what we’re all ultimately searching for: the slope of economic growth.
The first is showing just how seasonal the Birth/Death adjustment really is. The key takeaway here is that beyond next month, made-up job creation will be less able to support whatever headline Payrolls growth we have left:
The second chart is that, on a year-over-year basis, Private Payrolls growth excluding the Birth/Death adjustment is running at +21k. Though up from -12k in April, that compares to +267k YoY as recently as February. Through the first five months of the year, we’ve added a cumulative net +363k actual private-sector jobs on a YoY basis. That's well below the reported figure of +550k YoY, which includes the B/D adjustment:
The last chart is perhaps the most daunting as it relates to the economy. On three different measures, Real Wage growth has either flat-lined or is trending down. And with unemployment remaining high and reported inflation remaining sticky, one could make a compelling argument that these trends will only get worse before they get better. We don’t disagree:
Net-net, if there’s one thing we’ve learned from today’s Jobs Report it is that consensus has to start accepting the fact that US growth is slowing and that forward EPS estimates need to come down. While the sell-side continues to ratchet down their growth “forecasts” after seeing the data, we’ll continue to stick to our process and help you manage risk before it happens. Growth is slowing and it’s much less “transient” than the bulls think it is. Even with the world’s largest bond fund net short US Treasuries, the bullish bid across the bond market is telling us just that.