The payroll slowdown has jumped from being an energy sector problem to an all-industry problem. Industrial companies are currently in a defensive posture because they expect little or even slightly negative revenue growth this year. It is only a matter of time before the “wait-and-see” approach to capital expenditure (CAPEX) and operational expenditure (OPEX) investment jumps to the broader economy.
1Q Not at Risk: Payrolls Driven by Seasonal Layoffs
Businesses don’t really hire in January and February. For example, the January payroll period lasts from December 13 through January 13, when businesses shut down and people go on vacation. For these months, the non-farm payrolls are really tracking the difference between actual seasonal layoffs and the model’s expected seasonal layoffs. It’s a function of the mechanics of payrolls.
Recent podcast What California Reveals About the Rest of the Economy
The reason 1Q is not at risk is that layoffs are pretty moderate. Specifically:
- The Challenger Gray job cut report shows December had the lowest announced cuts in 15 years, while January’s were flat to last year (ex-Walmart (WMT) and Macy’s (M) store closures).
- Materials/energy layoffs are slowing down. Mining/oil payrolls have already been cut to almost pre-Bakken levels.
In fact, I expect the January payrolls to be revised up again; closer to my 200K+ forecast.
2Q Is at Risk: Hiring Is Already Under Pressure
Companies may not be pressured to fire when revenues flatten, but they also don’t expand their staff. In fact, companies are already reducing their hiring plans.
One of my favorite bellwether companies is Analog Devices (ADI), which dominates the world of analog/digital converters. It’s not an exaggeration to say that these are the fundamental nuts-and-bolts of electronics. Everything uses them. ADI’s breadth and depth of coverage means that it is a proxy for the world’s economy.
A quote from ADI CEO Vincent Roche’s recent earnings call says it all:
“We’re going to be very cautious about how we deploy capital and operating expenses until we’re really clear on what the macro environment looks like.
I think all the big industrial companies are projecting very, very low single-digit growth or flatness through the year.
So you’ve got to take all that into account when you’re trying to run your business here.
There is uncertainty in the market. I think our customers feel the same, feel this uncertainty and just aren’t sure what the outcome will look like for this year.
And the result I think when those situations arise, it’s best to be on the cautious side of things.
And if things turn out to be more positive, that would be great. We’ll put the money to work at that point. And if it doesn’t, we’ll have protected our income statement.”
Companies don’t expand the workforce when heading into a no-growth environment.
Timing the Downshift
There are three reasons why 2Q is the payroll inflection point down:
- March payrolls get released in April: March begins the hiring season, and that’s when this hiring slowdown will start to get reflected.
- April kicks off earnings season and layoff announcements typically follow the earnings cycle: It makes weak guidance go down easier when there’s a Plan B in place.
- Spillover into the broader economy: Industry is planning on more cuts to CAPEX and OPEX. It is broadening and moving into all sectors, not just materials/energy. That will spill over into the broader economy. Even the 1% is being hit: Tiffany’s (TIF) just announced flat sales and guided down 2016 expectations. As the 1H progresses and hiring plans continue to weaken, employees will start to turn frugal. Personal consumption will begin to slow.
The stock market is presenting an investing opportunity: divergence.
The market is marching up again on the back of a cheap dollar. Meanwhile, the underlying fundamentals are about to weaken rapidly. The big bet right now is that the Fed will raise rates again, possibly as soon as June. If the payrolls come in light, that won’t happen. If the fundamentals turn fast, as I expect payrolls to do, the market will shake.
Sell into this strength.
