Last week, labor data from Automatic Data Processing, Inc. (ADP) and the Bureau of Labor Statistics (BLS) were updated for the month of December. ADP Nonfarm Private Payrolls reported a +807,000 jump in the month of December, the largest increase since May 2021. This marks the twelfth consecutive month of positive prints for ADP Payrolls. The BLS released the Nonfarm Private Payrolls Report (NFP) showing another month-over-month deceleration at just +211,000. This was the softest print since January 2021.
The divergence in the headline number of the ADP and BLS reports can at least partly be attributed to the data collection methodology that captures different areas of the labor market. Therefore, it is important to monitor other economic and market signals in conjunction with these labor reports to form a more complete view of the current environment. But first, we will take a closer look at the components of the payroll reports to provide insight as to which industries appear to have accelerated in December.
The ADP National Employment Report recorded increases across the board. Most of that acceleration is attributable to service-providing industries, which came in at +669,000. Within services, Leisure/Hospitality led with +246,000 jobs, followed by Trade/Transportation/Utilities and Professional/Business Services posting +138,000 and +130,000, respectively. Goods-producing industries were up just +138,000, led by increases in Manufacturing (+74,000) and Construction (+62,000).
The BLS Nonfarm Payrolls Report captured similar trends in service-providing industries where Leisure/Hospitality was up +53,000 and Professional and Business Services increased +43,000.
Goods-producing industries also saw a bump. Manufacturing came in at +26,000 and Construction was up +22,000. Despite these increases, the rate of change compared to the prior months’ pace decelerated for the second month in a row.
Average Hourly Earnings for all private nonfarm employees picked up 19 cents to $31.31, alongside an increase from $26.43 to $26.61 for production and nonsupervisory employees. Average Workweek for all private nonfarm employees was unchanged at 34.7 hours in December.
Labor Force Participation (LFP) was unchanged at 61.9 which is still well below the pre-pandemic level of 63.4. We will continue to watch the LFP rate as it provides more clear-cut insights into whether the employment picture is improving.
A significant portion of consumer financial health has been held up by government transfers over the last twenty months. If the labor market does not improve substantially, then the positive consumer spending growth we have seen in 2021 will likely decelerate.
Meanwhile, average weekly hours and average hourly earnings have only moved up modestly. With consumers making up roughly 70% of GDP, the consumer income setup could put downward pressure on consumer spending resulting in slower economic growth. However, as stated above, it’s important to look at other economic measures and market signals to form a complete view of the current environment.
Last week, the U.S. 10-Year Treasury Yield moved up 25 basis points and the 2-Year moved up 10 basis points. However, the 10-Year inched up just 3 basis points on the day that BLS Payroll data was released, and the 2-Year yield was essentially unchanged.
The U.S. Dollar Index fell on Friday and has been flat to down for over a month.
More cyclical sectors have outperformed over the last month and accelerated further last week. Consumer Discretionary and Tech are now negative on a one-month basis. Value and High Dividend paying companies are leading all other factor exposures. Momentum and Growth factors have underperformed.
The mild payroll report and rotation away from Tech and Growth companies is a signal that other measures may start to slow over the next few months. We will continue to monitor this trend change through the first quarter of 2022.
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.