The stock market may continue to churn until a view of the likely course of Fed monetary policy becomes clearer. The absence of official US economic data as a result of the government shutdown has obscured the view, helping to explain the large swings in the market. The first major US economic data release will be the September Employment Report on Thursday. Unemployment Insurance Claims, though, may be more important.
Employment
The evidence regarding September Payrolls is mixed. /1/ The ADP monthly estimate of a decline that month points to a weak Payroll print (see table below). ADP and First-Print Private Payrolls moved in the same direction (speeding up or slowing down) each month since April. /2/ But an improvement in Unemployment Claims suggests a speedup in September Payrolls. Continuing Claims fell between the August and September Payroll Survey Weeks, suggesting a pickup in hiring. They too have a good record predicting speedups and slowdowns in Payrolls -- better than ADP for Final-Print Payrolls.
The market reaction may be muted if ADP is right and September Payrolls are weak. This is because the latest monthly ADP Estimate indicated a rebound in October. Nonetheless, what should be important for the Fed is the trend in job growth. Along with the latest bi-weekly 4-week moving average of -11k, the 3-month average of ADP suggests the trend is flattish -- and argues for a Fed rate cut.
A speedup in September Payrolls, in contrast, would argue against a Fed rate cut at the December FOMC Meeting. However, at this point it should be viewed as history. The path of the jobs market over October and November is more important. Unemployment Claims, particularly Continuing, would offer the best evidence. The Fed will likely have up-to-date data on Initial and Continuing Claims in time for the December FOMC Meeting. Unemployment Claims may be the easiest data to compile and release. They are collected by state governments, who continued to do so while the federal government was closed.
Unemployment Insurance Claims are the best measured, broadest and most up-to-date labor market data. They are a universal count, unlike the Payroll data which are based on surveys, so there is no measurement error. They are among the broadest measures because they cover the whole private economy. (Federal government workers are covered by a separate unemployment insurance system, so are not included in Initial or Continuing Claims.)
Initial Unemployment Claims -- which measures the number of people filing for Unemployment Insurance for the first time after being laid off -- were in a tight range around 225k during the first 9 months of the year. They did not show any significant uptrend in layoffs. In contrast, Continuing Claims -- which measures the number of people filing for Unemployment Insurance in the weeks after the first -- had ratcheted up from May through July, suggesting hiring had pulled back. They began to trend down in August and reached a low of 1.926 Mn in mid September. The swing from worsening to improving is consistent with other data suggesting the weakest point in the economy occurred in the middle of the summer, as discussed in last week's blog.
Inflation
A catch-up in the release of CPI data does not look likely according to news reports, since the government shutdown prevented BLS from canvassing prices during October. This is unfortunate, because there's reason to think it would be a benign print. Besides the possibility that Owners' Equivalent Rent would stay low as in September, seasonal factors work to hold down airfares. Used Car Prices could be soft, as well. These components could offset tariff-related price boosts in other components.
Tariffs
There is almost no question that tariffs reduce the US standard of living -- acting as a tax on consumers and directing resources to more costly production. So, it is not surprising that voters voiced their displeasure in the recent elections. (Tariffs would not impact the US standard of living if foreign exporters bore all of them by lowering their prices as an offset -- which was not the case.) Trump recognizes the popular displeasure by raising the possibility of $2,000 payments to presumably lower-/middle-income people. There is a theoretical justification for this kind of payment. The impact on a consumer of a change in the price of a good or service can be de-composed into a substitution and income effect. The substitution effect shows how the consumer will adjust purchases to the change in the relative price of the item. The income effect shows the lost purchasing power from the price hike. Trump's proposal could be viewed as an attempt to offset the income effect of the tariff-induced price hikes. The substitution effect still would be in play.
Private Payrolls (m/m change, 000s)
ADP Estimate First-Print BLS Latest-Print BLS Continuing Claims *
March 155 209 120
April 62 167 133 14
May 37 140 69 -74
Jun -33 74 -27 -57
Jul 104 83 77 18
Aug 54 38 na -8
Sep -32 na na 18
Oct 42 na na
* the inverted change in Continuing Claims between Payroll Survey Weeks, 000s
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