INDICATOR: May ADP Private Sector Job Estimates
KEY DATA: ADP: 135,000; Manufacturing: -6,000; Small: 58,000; Medium: 39,000; Large: 39,000
IN A NUTSHELL: "It just may be that some on the Fed are celebrating the economic recovery too soon as job gains seem to have slowed."
WHAT IT MEANS: With the tape(r) worm eating at the insides of some of the inflation hawks at the Fed, the concern I have expressed is that the economy is still not strong enough to warrant a cut back in Fed policy. As long as fiscal policy remains restrictive and tax increases cut into spending, it is hard to see where strong growth is going to come from. A warning that the spring slump may be on us was seen in ADPs estimate of private sector payroll gains in May. They were disappointing, to say the least. Negative effects of sequestration might be reflected in the manufacturing payroll cut back. Reduced defense spending was expected to hurt manufacturing and that just might be the case. That is not to say the services sector was strong, it wasn't as only 138,000 new workers were added. That needs to be at 200,000 or more if we are to have solid gains. Also, while large employers are pulling their weight, small and especially mid-sized firms are being very cautious in their hiring and that is not good news.
MARKETS AND FED POLICY IMPLICATIONS: The economy is not soaring and the recent weakness in job gains is a worry. That is because wages are going nowhere. Actually, they are going down. Revised first quarter productivity numbers were released today and they showed a sluggish productivity increase but more importantly, a huge decline in hourly compensation. Unit labor costs dropped sharply more because of income reductions than output gains. It would be better for the economy if productivity surged, reducing unit labor expenses. We remain in this negative cycle of slow growth causing sluggish hiring which allows firms to limit wage gains which keeps consumption from accelerating which restrains growth. Washington has not helped as the sequestration is reducing government spending and the tax increases have strained household finances. Now the Fed is talking about beginning the process of normalizing monetary policy. That is a nice idea but probably one that will only add further restraints to growth. A reduction in the quantitative easing program will lead to higher interest rates. The recent increase in mortgage rates will not slow the housing market much but does anyone think it will help? In the short term, some people will jump off the fence and buy as they fear even higher rates but that is only a temporary push. The warning from today's reports is that the Fed should think longer and harder before it does anything. Bad fiscal policy should not be matched by bad monetary policy. All that said, the ADP report has been off lately so Friday's employment report may not be terrible. But don't expect it to be great. Nevertheless, investors cannot be cheered by a potential soft jobs report as it raises questions about future earnings.