Stocks Fall on Dueling Job Market Reports

July 7th, 2023

Stocks slipped during a 4th of July shortened trading week. Jobs were this week’s focus, where the strength of Thursday’s ADP jobs report jolted markets on concerns the Fed will be forced to be more aggressive in order to tame hiring demand and cool economic growth. Of particular concern was the fact that recent ADP reports had previously shown weaker employment gains than those reported in the official Labor Department’s non-farm payroll report, which was set for release on early Friday. While these reports tend to be directionally consistent, they can exhibit notable divergences period to period. Fortunately, Friday’s Bureau of Labor Statistics (BLS) report managed to ease investor fears, showing 209K new hires in June, well below ADP’s 497K print. Along with jobs numbers, the ISM released its June services report which showed the sector continues to benefit from strong consumer demand. For the week, the S&P 500 shed -1.16%.

Sizzle of Job Market Depends on Who is Measuring

On Thursday, payroll processor ADP reported that a blistering 497K jobs were added to the payrolls in June. This figure doubled advanced estimates while showing that wages continued to grow at a 6%+ annualized rate. While the market reacted negatively to the headline figures, the report was not as provocative as it initially appeared. Nearly half of the gains were concentrated in the seasonally strong leisure and hospitality sector where businesses boosted their payrolls to meet the anticipated summer rush. While travel and dining remains quite hot, there is evidence of weakening consumption overall, and the hiring in the sector might simply reflect a last hurrah before the consumer settles into more modest habits in the fall and winter. While the ADP report had investors wringing their hands, June’s Labor Department report delivered a considerably more modest figure of 209K new hires. This figure was lower than analysts’ estimates of 240K – well below May’s 306K reading – and it was the slowest month for job creation since payrolls fell by 268K in December 2020. According to the Labor Department, June’s unemployment rate did fall 0.10% to 3.60% even as the prime-age participation rate rose to 83.50%, its highest in 21 years. Like the ADP report, the Labor Department showed continued wage growth, rising 0.40% for the month and up 4.40% from the year ago period. Interestingly, the Labor Department and ADP reports diverged slightly on where jobs were added. Where ADP reported the most significant gains were in hospitality/leisure, the Labor Department survey showed that job gains were most concentrated in healthcare and government. The Labor Department showed that healthcare added 65K new hires while government employment rose by 60K. The strength in government hiring could be peaking, however, given that government hiring tends to lag private employment. Additional evidence of a cresting jobs market was contained in the Job Openings and Labor Turnover Survey (JOLTs). The report showed that jobs openings fell by 496K in May to 9.82 million. Openings outnumbered the available labor pool by 1.6 to 1 for the month, a level that had been closer to 2 to 1 just a few months ago. Furthermore, anecdotal evidence of a hiring slowdown is beginning to emerge with firms extending start dates of recent hires, initial applications for unemployment benefits rising 20% from the start of the year, and as pay cuts are becoming more common – particularly in those professions most in demand during Covid. While the ADP and Labor Department reports were wildly different in their orders of magnitude in June, the takeaway is that the job market still remains quite strong – varying by degree by who is measuring.

Consumer Spending Lifts Services Sector

Strong demand for services lifted the sector for the sixth consecutive month. The ISM Services Index rose to 53.9 in June, up from 50.3 in May. Numbers above 50 indicate expansion while numbers below indicate contraction. Growth was driven by an increase in new orders, employment, and business activity which accelerated due to easing supply chain constraints. With the service sector back in solid expansion, businesses indicated that they are upbeat about the immediate future for the economy, citing healthy demand and signs of stabilizing inflation rates. 

Final Thoughts

Thursday’s ADP report disrupted what looked to be an otherwise calm week of trading. The report’s headline figure of 497K new hires came as surprise, but it was skewed by strong hospitality/leisure hiring during the crush of summer travel. In contrast, you have the Labor Department’s report, which showed some softening relative to previous months, but was still a very solid reading.  Neither of these reports is likely to materially change the debate within the Fed over the degree or timing of rate hikes at the next FOMC meeting in late July. Fed officials have repeatedly used the term “resilient” when describing the economy’s ability to maintain its momentum while absorbing the impact of higher rates. This resilience has been broad based including the resilience of personal income, outlays, new orders, GDP and other economic readings. The strength of the jobs market is just another of these measures. Come July, the debate within the Fed is unlikely to center on any one indicator and focus more on just how long the Fed will remain patient with the economy’s continued resilience.

The Week Ahead

The Q2 2023 earnings season kicks off with big banks leading the charge. JPMorgan, Wells Fargo, and Citigroup will look to set a positive tone for the upcoming earnings season. In economic news, prices take the stage with the latest CPI and PPI reports. In overseas action, we’ll check in on global trade as China reports exports and import numbers.

The Clash of the Taco Titans and the Right to Taco Tuesday

Any person or business using the phrase “Taco Tuesday” without permission is in violation of a trademark, and it’s caused quite a tizzy in the taco world. Having a trademark for a phrase like Taco Tuesday gives the owner of that trademark the power to restrict usage and to police who uses it and under what circumstances. Taco Tuesday was trademarked in 1982 by Greg Gregory, the owner of Gregory’s Restaurant and Bar on the Jersey Shore in New Jersey. Gregory has been hosting Taco Tuesdays at his restaurant since 1979. Shortly after he filed for the trademark, a chain of Mexican food restaurants in the Midwest started using the term. Taco John’s is headquartered in Wyoming, and the restaurant claims to have coined the term Taco Twosday in the early 1980s with a two-for-one taco deal, and eventually they began using Taco Tuesday. In the 1980s, Gregory’s Restaurant and Bar and Taco John’s reached an agreement whereby Gregory’s would hold the trademark in New Jersey and Taco John’s would take the other 49 states. Today, Taco Johns has nearly 400 restaurants in more than 20 states.

Many would argue that neither restaurant came up with Taco Tuesday and that the phrase was in existence long before anyone filed for its trademark. One of the earliest examples of a restaurant promoting something akin to a Taco Tuesday was in an ad that ran in the El Paso Herald Post for taco specials on Tuesdays in 1933. The phrase Taco Tuesday appeared in a 1973 advertisement in the Rapid City Journal in South Dakota for Snow White Drive-In asking people to “Stop in on Taco Tuesday.” There are numerous other instances of Tuesday taco specials and Taco Tuesdays over the past five decades. In 2019, basketball superstar LeBron James filed a request to trademark the phrase “Taco Tuesday” with the United States Patent and Trademark Office (USPTO) after he began making Taco Tuesday posts on his social media channels, showing his family enjoying tacos on Tuesdays. The patent office rejected his application and said that the phrase was “a commonplace term.” LeBron was thrilled that their response meant he could be protected from a lawsuit if he continued posting about Taco Tuesday.

Fast forward to May 2023 when Taco Bell threw its sombrero into the ring over the ownership of Taco Tuesday. Taco Bell filed a petition with the United States Patent and Trademark Office USPTO to cancel the trademarked status of Taco Tuesday so that individuals, taco restaurants, food trucks, and anyone who serves, sells, or eats tacos and wants to use the term Taco Tuesday can do so freely without the threat of legal recourse. Taco Bell concurrently released a 30-second “Taco Bleep” commercial that features none other than LeBron James. In the ad, James is bleeped every time he says the words “Taco Tuesday” and then explains that everyone should be free to use the phrase and invites users to join the liberation movement. 

Taco Bell, which has 7,200 locations across the U.S., cleverly picked a Tuesday (May 16, 2023) to file the petition to cancel the trademark and said it seeks no damages or trademark rights, but simply to make the phrase freely available to all who make, sell, eat, and celebrate tacos.

Taco John’s and Gregory’s both filed responses to Taco Bell’s challenge, defending their right to enforce the trademark. The great taco challenge is headed to the courts. Experts have said that it will be difficult for Taco John’s and Gregory’s to defend their trademark because Taco Tuesday is such a common phrase and has been used so widely that it has become generic. A once-protected trademark can lose its rights if it becomes commonly used and does not reference any one particular product or brand. Examples of trademarks that have become generic include aspirin, escalator, nylon, flip phone, raisin bran, laundromat, and videotape – each of which was once trademarked but now considered generic and not protectable under trademark law.