More Than Meets The Eye: Rebound in U.S. Employment In The Offing?
Stock prices tumbled while the yield on the U.S. 10-year note fell to its lowest level in a month as the U.S. Bureau of Labor Services (BLS) June employment report shocked the market with a paltry gain of 18 000 jobs in payroll employment compared to a consensus forecast of 88 000. Payroll gains for April and May were also revised downwards.
The number was contrary to what the ISM PMI surveys and the ADP Survey had indicated.
Sources: ISM; US Bureau of Labor (BLS); Plexus Asset Management.
What do I read in the low employment figure? Not much, really. It is an extremely volatile time series heavily influenced by the government sector as can be seen in the graph below in which the BLS total non-farm payroll employment is depicted against the BLS private non-farm payrolls, with the difference being the government sector.
Sources: US Bureau of Labor (BLS); Plexus Asset Management.
The BLS private payroll employment is also much more volatile than the ADP private payrolls.
Sources: US Bureau of Labor; ADP; Plexus Asset Management.
To me the relationship between my GDP-weighted ISM composite PMI employment index and ADP private payrolls is more stable than that between the composite PMI employment index and the BLS private payrolls, indicating that the latter is a more trusty reflection of the underlying trend in employment. What is evident, though, is that over the past three months private non-farm payroll employment has been weaker than my composite PMI employment index suggested. Well, what would you expect with all the black swans around? Concerns about the global economy, especially on the back of the MENA uprising, rising oil prices, Japan's terrible twin disasters and the resultant disruptions in supply lines, as well as a possible default by Greece recently, would have led employers to err on the conservative side.
Sources: ISM; ADP; Plexus Asset Management.
An interesting development in the relationship between the composite PMI employment index and ADP non-farm payroll employment is that the latter has started to lag the composite PMI by one month since the middle of last year.
Sources: ISM; ADP; Plexus Asset Management.
In light of the above the composite PMI employment index for June indicates that ADP non-farm payroll employment is likely to bounce further in July. With auto-related production in Japan increasingly turning to normal, employment in the U.S. manufacturing sector is likely to increase. I will not be surprised if ADP non-farm payroll employment will reach a figure closer to 300 000 in the near future as the gap between it and the composite index closes - that compares to June's 157 000 new jobs. From an overall point of view the government sector is likely to continue to shed jobs, with the tighter budgets being implemented diluting the improvement in private employment.
Sources: ISM; ADP; Plexus Asset Management.
Sources: ISM; US Bureau of Labor; Plexus Asset Management.
I cannot be as negative as some market commentators, especially if my composite PMI employment index remains above 50, thereby indicating increased hiring. The following graph clearly demonstrates that cumulative overall non-farm payroll employment (government and private sector combined) will continue to rise if the PMI stays above 50.
Sources: ISM; US Bureau of Labor; Plexus Asset Management.
The same applies to the unemployment rate (please not the reverse axis).
Sources: ISM; US Bureau of Labor; Plexus Asset Management.
I therefore think that the market has overreacted to the employment number. The rally in bonds and the slump in equity prices could thus be another opportunity to realign portfolios.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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