Economic data is often confusing. It is not unusual for one set to suggest that things are going great, while another hints at trouble. Something like consumer confidence may be falling, for example, even as growth accelerates, or good manufacturing numbers may be contradicted by falling exports.
Each case of contradictory data like that is unique, but usually it comes down to a matter of time. Each report is a snapshot taken at one point, and some indicators look backward, while others look forward.
What is unusual, and puzzling, however, is when there are conflicting data around one indicator. That is what is happening now in the jobs market.
Tomorrow we will get the official jobs report for March, with the total of non-farm payrolls and the headline unemployment rate, and the guessing game as to what that will bring is particularly confusing this time around. The consensus estimate is for an increase of 175,000 jobs last month, with the unemployment rate holding steady at 3.8%.
Those would be decent numbers for an economy that has been adding jobs for around a decade but over the last couple of days we have seen two things that make those estimates look optimistic.
Yesterday’s ADP Payroll Report showed the slowest growth in private sector jobs for 18 months. The 129,000 positions added missed estimates, which is worrying enough, but the details are even more concerning. The biggest reductions came from industries such as construction and manufacturing that have led the recovery, and small businesses, which are typically more responsive to immediate economic conditions, also performed poorly.
That indication that maybe things are beginning to turn in the jobs market was then confirmed this morning, when the Challenger, Gray and Christmas quarterly jobs report showed that layoffs increased by 10.3 percent from the last quarter, which represents a massive 35.6 percent increase from the same quarter last year.
Those were the worst numbers since 2009, which has an ominous ring to it.
Yet up until now at least, the jobs story has been a consistent bright spot in the U.S. economy. We are at the lowest levels of unemployment seen for a long time and have continued to add jobs after all these years of expansion. That is according to the official Bureau of Labor statistics numbers, which have a history of being a much more reliable indicator of underlying economic strength than the private sector reports mentioned above.
So which is it? Are we turning the corner and heading to a pullback, or is this just hirers taking a breather after such a long period of expansion?
Unfortunately, the first scenario makes more sense.
The differences in this case cannot be put down to forward or backward-looking data. By their nature, reports on jobs and hiring all look backwards. To interpret their future impact, we have to dig a little deeper into the numbers. The Challenger, Gray and Christmas report did that, and what they found was not encouraging.
Their conclusion: ”Several indications, such as the number of companies filing for bankruptcy or closing operations, suggest we're heading for a downturn.”
In addition to weakness in non-farm payrolls, investors should be watching tomorrow’s report for any revision to last month’s numbers. They showed an abysmal 20,000 jobs added in February, but there were a whole host of excuses context of the lowest unemployment rate for fifty years it was easy to write that off as an anomaly. If there is no significant upward revision and tomorrow brings another disappointment though, it starts to look like a trend.
As to how investors should react, or even whether they should react at all, that, as usual, depends on your time horizon. If you are investing for retirement many years from now, you should do nothing. Over time, stocks go up. There is no rolling twenty-year period when equities have fallen in the history of the market.
If you are not looking that far away though, reducing your exposure to equities should tomorrow’s numbers be bad would make sense.
The market has been acting on two assumptions over the last few months, that a trade deal is imminent and that the effects of the tariffs to date are minimal and temporary. If the jobs report confirms what the private data suggest, that the second is not true, it would make the first moot, as any deal could be seen as too little, too late. That has the potential to cause a major selloff, but at the very least would severely limit the upside as we wait to see what any deal would look like.
Tomorrow’s numbers should therefore be watched closely and regardless of any excuses, bad news should be taken at face value.