Jobs Gains May Be Stalling, but Markets Keep Driving Growth

The New York Stock Exchange. (Michael Nagle/Bloomberg)

Key Points

• Despite a weaker-than-expected decline of 32,000 in September private payrolls, major stock indexes reached new records.
• Robust consumer spending, indicated by a 3% annual growth projection for the third quarter, led to a revised real GDP estimate of 2.7%.
• Surging household wealth, particularly from equity gains among higher-income households, is driving economic activity and spending.

What’s the use of labor, either the data or jobs themselves, when the capital markets keep cranking out wealth?

Another government shutdown deprived the markets of their usual first-Friday-of-the-month fix from the employment report, which was no deterrent to major stock indexes notching more records. And megadeals such as the $55 billion leveraged buyout of Electronics Arts indicate an acceleration of the bull market in capital-markets activity, according to strategists at Evercore ISI led by Julian Emanuel.

In the absence of the monthly data from the Bureau of Labor Statistics, there was greater focus on ADP’s tally of private payrolls, which showed a weaker-than-expected decline of 32,000 in September. That comes on the heels of a sharp deceleration in the BLS’ total nonfarm payrolls growth to just 29,000 a month in the three months through August, the last data release from Washington, from the 175,000 to 200,000 pace earlier in the year, according to Steven Ricchiuto, chief economist at Mizuho Securities USA.

But spending has been robust in the face slowing job gains, which presents a conundrum, writes BofA Securities Senior Economist Aditya Bhave. Second-quarter revisions to gross domestic product and consumption data for August showed stalwart spending. BofA’s debit and credit data, plus Ward’s automotive sales numbers, point to continued momentum into September. That suggests 3% annual growth in spending for the third quarter, resulting in the bank upping its real GDP estimate to 2.7% from 1.5%. That’s still shy of the 3.8% GDPNow tracking by the Federal Reserve Bank of Atlanta.

How, then, to explain robust growth in the face of continual laments that “half of America is flat on its back”? Household wealth has been surging, Bhave says, with equity gains accruing to higher-income households, giving them the wherewithal to spend.

Indeed, adds Gerard MacDonell, an economist at 22V Research, one cannot discount the overwhelming impact of the top end in driving the economy. And given their record equity holdings, it “means that the stock market should be driving high-end activity, not just always, but especially in this environment,” he adds in a client note.

But even a stock market correction shouldn’t dent spending by the wealthy, says BofA’s Bhave. “Given the massive cumulative gains in stocks over the past few years, it would take a larger and/or more enduring drop in stock prices to reverse the higher-income wealth effect,” he observes.

Nor does the prospect of massive layoffs of federal employees during the shutdown upset the bulls. Their response is that would just mean more Fed rate cuts, says Evercore ISI’s Emanuel, which suggests a complacency that could make stocks susceptible to more volatility.

With government data mills shuttered, information from private sources takes on greater importance, especially commentary, with quarterly earnings reporting season about to start. That should shed some light also on the impact of tariffs, which Morgan Stanley economists write have been mainly absorbed by companies, resulting in reduced hiring and profitability.

Meanwhile, the ever-rising tide of the stock market is lifting all boats in the economy.

Write to Randall W. Forsyth at randall.forsyth@barrons.com