A couple weeks ago the Department of Labor reported 287,000 jobs were created in June. A robust report. However, a month prior, the Department of Labor reported only 11,000 jobs were created in May. A very weak report. Is the labor market weak or strong and why the huge dispersion between months? I believe it has more to do with the government’s calculation methodology than reality.
From what I observe with the businesses I follow, barring a sudden shift in demand for products or services, companies don’t significantly alter labor plans from month to month. Labor decisions aren’t made lightly as turnover and misjudging the need for labor can be very expensive. Before hiring or firing, companies want to be certain changes in demand trends are sustainable. For example, when demand plummeted in the second half of 2008, many companies I follow waited before announcing layoffs to make sure the decline in demand wasn’t just a blip. It took some companies a couple quarters to finally face the facts and bring costs, along with labor, in line with new demand.
I continue to find it amusing that investors pay so much attention to the monthly job reports. We know government estimates on jobs can be lumpy and we know they’ll be revised (often sharply). There are also seasonal adjustments and the birth death model (estimate of job creation from business startups) that significantly influence the government data. As I commented in a previous post, if you want a clear picture of what’s going on with the real economy, consider getting your data points from actual businesses, not the government.
Fortunately we received a timely economic and employment data point yesterday when Cintas Corp. (CTAS), a market leading uniform company, reported earnings and provided insightful commentary on its conference call. Approximately 50 minutes into the conference call an analyst asked a question regarding employment trends. Management’s response was very interesting and confirms what I’m seeing with many of the companies I follow – growth remains uneven and slow, but is also not getting significantly worse. It’s more of the same — a similar environment to what I’ve been documenting since mid-2014, when the economy and profit trends were considerably stronger.
The analyst initially asked management about the negative impact from the oil and gas industry. As I mentioned in a previous post, I believe the earnings drag from the energy industry will continue, but companies have had time to adjust and comparisons should become easier. Cintas confirmed this by saying, “Well, we — from an oil, gas and mining standpoint, we have seen continued deterioration, but I would say today, that rate of deterioration is slowing, certainly relative to 90 days ago.”
Management went on to discuss the economy more broadly, “…let’s call it [the] economic picture, I would say that it’s still a challenging environment. There’s not a lot of momentum to it. But I would call it stable. We haven’t seen a lot of change today compared to a quarter ago. And so, I would say we are continuing to operate like we have been. I would say as we look into fiscal 2017, if I were to make a comment about the economy that maybe did feel a little bit different, I would say today compared to — let’s call it six months ago, it does feel like there is a bit more uncertainty [emphasis mine]…We’ve seen the European issues; we’ve seen changes from the Department of Labor in terms of minimum wage and overtime that can have a pausing effect on our customers. We’ve got the election coming up. It does feel like there is a little bit more uncertainty than there was six months ago.”
So there you have it from the uniform maker’s mouth. Makes sense. I suspect May and June employment reports are inaccurate and the truth is probably closer to the average of the two months. Management’s comments were also helpful in confirming my macro views. Cintas sells to 900,000 businesses. I believe that makes them qualified to talk about the economy and employment trends. I’d much rather hear Cintas’ opinions on the economy and employment than those of a highly paid economist analyzing stale government data.
It’s very early in small cap earnings season, but so far it looks as expected and similar to what we covered in a previous post. Most companies are easily beating estimates, but overall organic top line growth remains challenging. This earnings season I’ll continue to point out data points I find interesting and any new developments that may appear. While fundamentals and valuations are currently not the main drivers of asset prices, I continue to believe it’s important to stay informed from a bottom-up perspective.