The Unemployment Rate: Backing the Truck Up

Submitted by Danielle DiMartino Booth of Quill Intelligence

  • As per Markit, manufacturing weakness has spread to services manifesting in weaker business activity and order trends compared to earlier this year; Markit’s job growth rate is at a two-year low while expectations for future growth slid to a seven-year low
  • ADP reports small business hiring has fallen by 76,000 over the past two months, the first back-to-back decline since 2008; in June, small businesses shed 37,000 jobs, nearly half of which were in construction which helps explain the burgeoning softening in truck sales
  • While the consensus expects the unemployment rate to hold steady at 3.6%, the rise in QI’s self-employed unemployment rate coupled withJune’s surge in the Conference Board’s ‘Jobs Hard to Get’ series suggest upside to the unemployment rate forecast

When only the best brass reeds for discriminating toy trumpets will do, call on Paul Bruder. Or at least that’ll how we romantics envision the humble beginning of that monument to one happy but noisy kids’ toy. Founded in Furth, Germany in 1926, Bruder’s factory combined meticulousness and precision to manufacture those teensy brass trumpet reeds, and it was that very attention to detail that   laid the foundation for the success of today’s favorite toy truck manufacturer. If you’ve never gotten down on the ground and played with one of these feats of engineering, we highly recommend you add it to your bucket list. Consider that the 1997 addition of model-sized profile tires to Bruder’s truck line required the construction of a four-story, 15,000 square meter facility and the addition of 120 employees. Yes, they’re as real as it gets.

As for full-size trucks with engines that roar, it’s likely Ford and General Motors are breaking a sweat after the latest slate of economic data hit the wires. Though its overall truck sales held up, those of Ford’s signature F-Series pickup truck fell over last year in June. GM was not as fortunate with sales of its Silverado and Sierra trucks down, especially on the heavy-duty side of the line-up. With the caveat that fleet sales can indeed be trucks and comprised 24% of Fiat Chrysler’s June sales, Ram pickups were nonetheless the standout as a fresh redesign and fat incentives drove sales up over 2018.

The popular Ram aside, we dare say there’s more to come in the disappointing truck sales department. As we’ve been warning, the stakes rise appreciably when weakness in manufacturing bleeds into services. A tip of our hats to QI compadre Peter Boockvar for catching this comment out of Markit amidst Wednesday morning’s economic data deluge: “A major change since the first quarter has been the broadening out of the slowdown beyond manufacturing, with the service sector now also reporting much weaker business activity and orders trends than earlier in the year.”

Overall, Markit reported job growth at a two-year low and expectations for future growth at a seven-year low. The ADP release helped us drill down even deeper, which brings us to those falling truck sales. As you can see above, small business hiring has sunk by 76,000 over the past two months, the first back-to-back declines since February and March of 2008. As a friendly reminder, we entered recession in December 2007.

While remarkable, what does that have to do with trucks? Don’t you know? Small businesses are dominated by contractors, you know those folks who make you crazy whether you’re building a whole house or redoing a powder room. Of course, they drive trucks but it’s likely they wish they were logging more miles. Of the 37,000 small business jobs losses reported in June by ADP, 18,000 were in construction — a non-manufacturing industry.

If you’re reading this, you’ve likely dragged yourself away from the beach, interrupting your long weekend for long enough to catch today’s jobs data for June. To honor your dedication, we’ve created a metric that enhances the household survey’s unemployment rate (U3) expected to hold steady at 3.6% this morning (we’d take the over on that, by the way). Consider augmenting your forecasting with said ADP data and QI’s self-employed unemployment rate — a marriage of nonfarm self-employed workers and all self-employed unemployed workers.

You may note shingle-hangers have had an even better run than the general labor force in the current expansion. We’d add that the self-employed rate tends to bottom before the U3 in past cycles. The current episode is no exception — it troughed last November at 2.250%, both below and before the U3 did at 3.585% this April. You may recall quite a bit of labor market data also began to weaken last fall, so we do not count this as a coincidence (we never do).

As to the why, it’s always easiest to cut workers at the fringe, which is who the self-employed are. Combine the jagged bottoming in the self-employed rate with June’s surge in the Conference Board’s ‘Jobs Hard to Get’ series, the magnitude of which has only occurred six other times and preceded average increases in the U3 of 0.4%.  Starting to sense upside to the forecast?

We’d add that the self-employed are generally unincorporated businesses that fly under the radar and are not picked up by the payroll survey that generates the headline jobs figure. To gauge start-ups, the payroll survey uses the notoriously disputed ‘birth/death’ model, which we’ll let you Google if you’re unfamiliar.

To recap: Fewer heavy truck sales. Rising small business construction job losses. An increasing self-employed unemployment rate. A spike in perceived job market weakness. Hopefully you can now appreciate why we’re focused on the Bruder truck precision of the household survey over that of the Tonka truck payrolls survey today. We suggest you do the same.