Nonfarm Payrolls September 2021

You can’t judge a book by its cover! Today’s headline jobs figure from the Bureau of Labor Statistics indicates payroll expanded by a mere 194,000 in September. Of course, this is a far cry from the type of gains that we were seeing a year ago (or even a quarter ago); however, the private sector held up reasonably well despite some late summer softness in the economic backdrop. In fact, private employers added 317,000 jobs last month. The labor market’s September soft spot is largely attributable to the government’s side of the ledger. According to the BLS, government payrolls shrank by 123,000! There was also some residual weakness from last month’s report within leisure and hospitality as the sector only added 74,000 jobs during the month of September. On the bright side, the official unemployment ticked down significantly to 4.8% and U6 clocked in at 8.5%. Importantly, these improvements in the unemployment picture are a bit misleading, given that September’s labor force participation rate actually decreased to 61.6%. Meanwhile, wages for workers jumped 0.6% MoM as the average American workweek improved to 34.8 hours. All in all this is not a disastrous report for the job market, but it certainly leaves much to be desired.  

Despite some headwinds, the domestic economy continues to chug along with ISM’s manufacturing and nonmanufacturing indices squarely in expansion territory (59.9 and 61.7 respectively). Moreover, there are some signs that the US consumer is making a bit of a comeback after a brief dust up with the delta variant. The latest from the Bureau of Economic Analysis suggests personal spending increased 0.8% MoM and new home sales increased 1.5% over the same time period. Speaking of new home sales, the Department of Commerce revised its August release significantly higher from a monthly gain of 1.0% to 6.4%! I guess it doesn’t hurt that Fannie and Freddie’s housing price index is up more than 19% YoY. Of course, that did not stop Robert Shiller from raining on housing’s parade. We would also be remiss if we did not mention a bit of dissonance on the sentiment front. Figures from the University of Michigan’s survey indicate broad improvement among American consumers in September, but on the other hand, the Conference Board’s report suggests confidence dipped yet again in September to a reading of 109.3 from its high of 128.9 in June. So, we will be keeping a very close eye on sentiment as we approach the holidays.

Inflation remains a tail of two very different perspectives. In the immediate term, it is a concern as corporate America continues to grapple with supply chain issues, labor shortages, and the prospect of higher commodity prices, particularly in the energy space.  Europe is in an energy crisis! However, the further out we look the less concerning it becomes as imbalances tend to self-correct over cycles. Of course, this time could be different, but for now we continue to have a more benign view of the current inflationary pressures on corporate earnings and consumer behavior within the context of the recovery. The road back to pre-pandemic levels has not been (and will not be) without a few potholes!

Get your pencils out because earnings season is here again! As far as corporate profits are concerned, 2021 has been stellar. We noted early on that the pace of the earnings recovery was likely to be impressive and it has not missed a beat thus far in 2021. So, will 3Q earnings be the proverbial fly in the ointment for American businesses? After all, the domestic economy has endured higher than expected inflationary pressures and a resurgence in COVID cases during the most recent quarter. Color us optimistic as we think the world’s largest and best run companies are still tracking for an exceptional year of earnings growth and we don’t think we have reached the apex. Please keep in mind that we do NOT expect the same pace of earnings growth going forward, but we do believe growth at some pace is a valid assumption. In light of that we are increasing our fair value estimate for the S&P 500 to 4725 and we will see you on the other side of earnings!             

Market Outlook: Neutral USD, Neutral Duration, Neutral Equities

News Release: Bureau of Labor Statistics (The Employment Situation- September 2021)