INDICATOR: January Private Sector Payrolls and December Pending Home Sales

KEY DATA: ADP: 213,000; Construction: 35,000; Manufacturing: 33,000/ Pending Sales (Monthly): -2.2%; Over-Year: -9.8%

IN A NUTSHELL: “Even in the face of the government partial shutdown, January job gains could be better than expected.”

WHAT IT MEANS: The broken record that I am keeps saying that the underlying economy remains solid and the issues with the equity markets are not the result Fed tightening or a realistic estimate on when the next recession could start. So, it’s time to start focusing again on the economic fundamentals and Friday’s jobs report should give us some insight into how businesses reacted to the political absurdities versus the real economy. If the ADP estimate of January private sector payroll growth, the shutdown may have been much ado about nothing. The employment services firm’s reading of job gains came in above expectations. The increases were widespread, with small, medium and large firms adding similar numbers of workers and just about every industrial sector hiring as well. What is eye opening was the continued outsized jump in manufacturing and construction payrolls. Together, they make up less than 16% of private payrolls, but the rise in those sectors accounted 32% of the January increase. That surge is not sustainable. In addition, firms that fall into the 500 to 999-worker range have also been adding workings at an elevated pace. The implication is that job gains may remain good, but don’t expect continued large increases in private sector employment.

As for the housing market, well things don’t look that good. The National Association of Realtors reported that pending home sales eased again in December and were off by nearly ten percent from the December 2017 level. For all of 2018, pending sales were of by 3.5%. You have to sign contracts to have closings so the consistent drop in pending sales signals future weakness in existing home sales.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data reinforce the view that businesses are still seeing strong demand and as a result, are hiring more workers. But there is also growing weakness in the housing market. The FOMC is finishing off its meeting and we should know the members’ thinking in a little while. Caution is likely the operative word, though the ADP jobs report, if born out by a solid government number on Friday, would not support that attitude. The economy is in good shape, for the most part. What is failing is government policy and that is creating chaos that is hurting the equity markets. The Fed, in my view, is overreacting to the equity market issues. But I want to hear what Mr. Powell has to say before making any further comments.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.