Hiring On The Rise?

Just days after I issued my forecast for a rather dull 2012 we read that the US private sector hired 325,000 people in December. This is according to ADP the payroll processing company that keeps an eye on such things. This is a noteworthy jump in activity by any standard and deserves to be commented on. If this number holds up tomorrow when we hear from the government in its total payroll data, then we all should breath better: the economy is showing signs of life.

But.

ADP has a track record of being a rotten forecaster at year end. Its seasonal adjusting is a little whacky. So the past couple of years its December figures have not been borne out either by the government numbers, or by subsequent evidence. So be warned: this may be a false dawn.

In order to root out support for the optimistic interpretation of ADP’s report we should look for possible corroborating trends.

New claims for unemployment assistance have also been trending down. Today’s report has them at 372,000 last week, compared with 387,000 the week before. Bear in mind that two week’s ago we saw a mild upward blip in claims, otherwise the recent trend has been steady, if unspectacular, progress. The tone in the job market is clearly improving, the data all are pointing in the right direction, the problem is that progress is still insufficient to break the back of our high unemployment levels any time soon. The gains are real but incremental. We need claims in the 325,000 a week range before we can think in terms of a healthy job market.

Beyond jobs we have evidence of improvement in manufacturing. Yesterday’s look at factory orders showed more strengthening. Orders were up 1.8%, right in line with expectations and much improved over November’s -0.4% dip. Couple this with Tuesday’s brighter Institute of Supply Management’s report on business conditions – their index of activity ticked up nicely to 53.9% in December from 52.7% in November – and the outlook seems better as we enter the new year. With both orders and general activity rising we can infer that the recent improvement in hiring will continue.

So, notwithstanding ADP’s seasonal issues, I think we can accept that things are on the rise. Probably at a less rapid pace than suggested by the ADP report, but nonetheless at a higher rate than the second half of last year.

Does this alter my forecast?

No.

I will stick to the view that the recent improvement has all the makings of a phase that will ebb when we butt up against the slow down being forced onto Europe by its 1930’s style policies. Add in the glaring fact that wages are stuck which means that even if people have a job they don’t have oodles of spare cash to go out and spend. Especially if they are still trying to pay down debt.

It is this debt liquidation that still dominates all other trends. There will come a moment when households reach a level of debt they feel comfortable with. I doubt they are there yet. Although US debt levels are down considerably they are not yet at sustainable levels in an economy that seems unable to generate many well paying jobs, and where asset prices – both stocks and houses – are still highly uncertain.

While this process continues we cannot expect consumption to pick up rapidly. So businesses will still be faced by stagnant sales and will only be able to boost activity in stores by repeating profit eroding discount programs. Thus, while overall activity may look better, the underlying issues remain sufficiently negative to drag growth back into the 2.0% range I have been predicting, rather than accelerating it above 3.0% where we need it to be to bring us back to full employment and a feeling of full recovery.

This is why I suggest we should be a little leery of the ADP figures. Let’s se what tomorrow brings.