SUMMARY: Employment growth was solid in November and seasonality will continue to build as a positive support through 1Q14. The preponderance of under-the-hood dynamics in today's payroll report were positive as well.
Meanwhile, Core PCE inflation remains at half of target and October Personal Income data was soft (although it carries the government shutdown asterisk) with personal income, disposable personal income and private sector salaries & wages all decelerating to start 4Q. The rise in payrolls and average earnings in the more real-time employment report, however, are all supportive of forward income growth.
So, from a macro fundamental perspective, the policy adjustment debate is/remains basically this: Strong GDP, Strong Manufacturing Activity, a Strong Labor Market (that will, optically at least, continue to strengthen) and recovering Confidence vs. below target Inflation, middling Income Growth, depressed Labor Participation, a recent Deceleration in Household Consumption and ongoing Fiscal Policy uncertainty.
We don't think the Fed begins tapering in December but we don't have any particular conviction in that. From a portfolio management perspective, we've continued to Buy the Bubble on pullbacks, managing our gross and net exposure within the immediate term risk range.
A summary review of this morning’s employment and personal Income and spending data below:
EMPLOYMENT: Summary Takeaways
- NFP: November saw a continuation of steady growth (on a 2Y basis) in NonFarm payrolls and the second consecutive month >200K
- Seasonality Reminder: Positive Seasonal impacts build from September through March then reverse to a headwind that builds over the April to September timeframe. Seasonality should manifest via strengthening improvement in the employment (NFP and Initial Claims) data through 1Q14 (see chart below)
- Unemployment rate: Unemployment rate dropped from 7.3% to 7.0% and U-6 Unemployment dropped to 13.2% from 13.8%. We didn’t recoup the big drop in the labor force observed in October but, on balance, the 0.3% decline in the unemployment rate was positive as the number of people employed increased and the number of people unemployed decreased alongside and increase in the total labor force
- Industry Employment: Employment growth was solid across industries with the exception of Finance & Information. Manufacturing saw its largest gain since March of 2012 – confirming the positive IP & ISM mfg activity data over the last few months.
- State & local government employment growth was positive for the 5th straight month, accelerating sequentially in November. Job loss at the Federal level remains ongoing with another 7K (-3.3% YoY) lost in the latest month.
- Labor Force participation and the employment-to-population ratio both increased
- Incomes grew as wage growth and hours worked both ticked up small.
PERSONAL INCOME & SPENDING: OCTOBER COUNTER-TREND DECELERATION
October saw a reversal of September’s income and spending dynamics where incomes grew at a positive spread to spending and the savings rate hit a YTD high.
Personal income declined -0.1% MoM and real disposable personal income declined -0.2% in October while spending increased 0.3% MoM and the savings rate dropped to 4.8% from 5.2%. Impacts from the government shutdown, however, complicate gleaning a clean read on the Trend.
While private sector salaries a wages decelerated in the latest month, the drag from government sourced income (federal/state/local) continues to ebb. As we’ve highlighted, if negative growth in government employment bases and government sourced personal income growth turns positive alongside a spending friendly, sequestration alternative budget deal, consumption growth could see some meaningful upside in 2014.
In the more immediate term, and from a GDP accounting perspective, a consumer still constrained by middling income growth will have some heavy lifting to do to expeditiously draw down rising private inventory levels.
Christian B. Drake