This Jobs Report Is 'Largely the Real Deal,' Says Morgan Stanley's Gapen

Key Concepts

• Payroll Revisions: Adjustments to previously reported employment figures, often due to benchmark revisions and “birth-death” adjustments.
• Durable Goods: Goods expected to last three or more years, often used as an economic indicator.
• ISM (Institute for Supply Management): A leading indicator of economic activity based on surveys of purchasing managers.
• Birth-Death Adjustment: A statistical adjustment to payroll data accounting for job creation and destruction in new and closing businesses.
• Sectoral Job Growth: Analysis of job gains across different industries (e.g., Health & Social Assistance, Private Education).
• Narrowness of Recovery: The concentration of economic growth in specific sectors or among high-income consumers.
• Purchasing Power: The ability of consumers to buy goods and services.

Labor Market Assessment & Economic Outlook

Michael Gapen of Morgan Stanley expresses cautious optimism regarding the recent jobs report, stating, “I think it is largely the real deal.” He acknowledges the presence of statistical adjustments – benchmark revisions and the “birth-death” adjustment – inherent in the report, but downplays their significance in negating the overall positive trend. While acknowledging a potential overstatement of 170,000 private payrolls, he suggests a 90% accuracy rate is still a valuable indicator. He frames this as, “If truth is 90, I’m happy with that number.”

Gapen emphasizes the report’s alignment with other positive economic data. He specifically cites strong durable goods orders, an uptick in the ISM index, and an upward trend in manufacturing output as corroborating evidence. He views complementary hiring alongside these factors as “a welcome sign for the economy.”

Retail Sales & Consumption

Regarding December retail sales, Gapen suggests focusing on them is “a waste of time,” though he anticipates a partial bounce back. He points out the frequent revisions typical of retail sales data, deeming the signal “always kind of maybe second order.” Despite the potentially weak retail sales figures, he projects overall consumption to reach 2.3% in the fourth quarter, characterizing it as “still a solid number.”

Job Quality & Sectoral Analysis

Lisa asks about the quality of jobs being created. Gapen notes that average hourly earnings suggest “quality jobs” are being added, though this is an aggregate figure across all sectors. He acknowledges the importance of any job creation, stating, “Any job is better than no job, so I certainly think there is quality in it.”

Further analysis reveals significant job gains in Health & Social Assistance (124,000) and Private Education. Gapen acknowledges that these sectors are relatively independent of the economic cycle, driven by demographic trends – an aging population and the cost of higher education. This leads to a discussion about the sustainability of the current economic strength, given the “narrowness of job gains.”

The Narrowness of the Recovery & Future Outlook

The core concern raised is the “narrowness of the recovery,” a point Gapen concedes is a long-standing issue. He identifies spending by upper-income consumers and AI-related business spending as the primary drivers of current growth. However, he anticipates a “broadening out” in 2026, supported by a stabilization in the labor market and a subsequent decline in inflation. He believes this will bolster the purchasing power of other segments of the economy, leading to more widespread growth. He links this potential broadening to the recent rebound in small-cap stocks.

Gapen’s thesis hinges on the idea that a stable labor market will be crucial for reducing inflation and, consequently, improving purchasing power across the economic spectrum. He frames the ongoing issue as, “It is the narrowness of the recovery and the ongoing…” – leaving the sentence unfinished, but clearly referencing the continued concentration of economic gains.

Conclusion

Michael Gapen presents a cautiously optimistic view of the US economy, acknowledging statistical nuances in the jobs report but emphasizing its alignment with other positive indicators. While recognizing the current “narrowness of the recovery,” he anticipates a broadening of economic growth in 2026, contingent on labor market stabilization and declining inflation. The key takeaway is that while the current growth is concentrated, conditions are potentially aligning for a more inclusive and sustainable expansion.