Positive Data at Year-End Shows Momentum Heading into 2017. The Curse of Q1?
- The December ADP Employment Report showed a gain of 153,000 private-sector jobs for the month.
- The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement.
- Initial Claims for Unemployment Insurance fell by 28,000 for the week ending December 31, to 235,000.
- Auto Sales surged in December, hitting an 18.4 million unit sales rate as dealers pushed incentives.
The ADP Employment Report for December indicated that 153,000 private-sector jobs were added to the U.S. economy in December. This was a little short of expectations and suggests that the official job count, released tomorrow morning, will show about 163,000 net new payroll jobs. The ADP Report is not a perfect predictor of the BLS numbers, but it does suggest that payroll gains may fall below expectations for December and are trending lower, as expected. Still, something in the neighborhood of 163,000 net new jobs for December would not be a bad number. Also, we would not be surprised if the unemployment rate ticked up in December after falling three- tenths of a point in November to 4.6 percent. The combination of a disappointing payroll gain and an increase in the unemployment rate may be a sobering combination for financial markets tomorrow, but should not be interpreted as a loss of momentum for the U.S. economy. Still, we are mindful that first quarter GDP data has tended to be weaker than expected in the post-recession period. We will be publishing our updated January U.S. Economic Outlook early next week.
The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Nine out of ten sub-indexes were above 50, indicating positive conditions in production, new orders and employment, amongst other areas. Out of 15 industries, 12 reported growth in December, including mining, retail trade, finance and insurance and information services. Three industries reported contraction in December. They were public administration, wholesale trade and agriculture. Anecdotal comments were generally positive. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing, suggesting that inflationary forces are building in the U.S. economy. The pace of inflation will be a key motivator for Federal Reserve interest rate policy this year.
Even if job growth was not robust in December, consumers felt confident in taking advantage of generous incentives at auto dealers. U.S. auto sales surged in December to an 18.4 million unit sales rate, the best monthly sales rate since July 2005. Strong sales in the fourth quarter pushed total sales for 2016 to 17.54 million units, a new record. We suspect that strong year-end sales will cannibalize sales from early 2017 and we will see a reset in auto sales at the start of this year. We have been bearish on auto sales for 2017, expecting them to gradually ease in a typical late-cycle pattern. However, we can also say that consumer spending on autos as a percentage of disposable income remains low, so consumers have some room to keep buying new wheels if they want to. Initial claims for unemployment insurance fell by 28,000 in the last week of 2016, to hit 235,000. This is an exceptionally low number, indicating that labor market conditions remain tight even as payroll job growth has eased off the robust +200K per month pace of 2014 through 2015. If we get 163,000 net new payroll jobs in December, with no revisions to history, we would end the year averaging 179,000 net new payroll job per month for 2016.
Market Reaction: U.S. equity markets have given up early gains. The yield in 10-Year T-bonds is down to 2.36 percent. NYMEX crude oil is down to $53.02/barrel. Natural gas futures are down to $3.19/mmbtu.
For a PDF version of this Comerica Economic Alert click here: ADP 01-05-17.