Thursday, November 1, 2012
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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
Automatic Data Processing
) 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
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,
) came ahead of expectations this morning, while
) 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
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
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