Climbing a wall of worry

As we prepare for Friday’s US Department of Labor’s release of the May non-farm payrolls report complete with the unemployment rate,  I have rarely seen such confusion about how good or not so good it will be. Everyone is so negative because of the soft patch the economy has hit, more on that later.   I will begin by saying that it will show a gain but the range of gains is estimated from sub 100k to almost 300k of jobs created, I think it will be a high number (200k plus because the birth/death adjustment).  The weekly jobless number which comes out every Thursday morning at 6:30 a.m. and has been spiking slightly up for the last month after 1 ½ years of relatively consistent drops in the weekly number bodes poorly for this Friday’s number.  This bump up in weekly jobless numbers may be an aberration and I hope it is but I am concerned.  Concerned because as this weekly number has been moving up, the regional Fed manufacturing numbers have been coming in rather poorly, the widely anticipated S&P Case-Shiller home price index for March dropped 3.6% today vs. the expected -3.4%.  This has some people speculating that the already moribund real estate market is double dipping, I don’t know if is, as this is dated material and April and May show something different.  What I do know is  that the manufacturing data while still showing expansion have been dropping, today’s consumer confidence number was weaker than expected because of higher gas prices, the housing market is weak regardless what the April and May numbers will show months from now.  The Euro is imploding over the PIIGS sovereign debt default issues, China is trying to slow it’s economy again, the US’s omnipresent debt  ceiling and budget impasse, and a  limp economy that just can’t pick up steam.  This speaks nothing of the concluding with the Fed’s QE2 which is coming to a fitful end right about now.  Have I depressed you yet, don’t worry the silver lining is coming.   In case you have been on vacation on a media free island, the stock market has been selling off for 2 weeks now because of these reasons.  It is hard to find good economic news these days, but the global expansion is not dead as central banks around the world who have had extremely easy money policies for over 2 years, and corporations have learned to do more with less, the world is awash in oil and gas and I believe the prices will come down now.  This all leads to better economic times over the next year.  The stock market is smart, trust me on this and it will bottom from this soft patch and move up before the individual investor realizes it.  If we get a bad number on Friday, the stock market should sell off, if we get a good number, I think the market will rally and then fail as investors are buying too much into the bad economic numbers of late, remember a rallying market climbs a wall of worry. 

Way above consensus April Jobs report

The Department of Labor just released the April jobs report which was up 244,000 vs. the 185,000 expected number which is the most since December of 2006 and the unemployment rate moved up to 9% which is a good thing as it means that discouraged workers have re-entered the job market looking for employment.  The unemployment rate had ticked down to 8.8% last month because many people had taken themselves out of the job market as they had become too discouraged to look for a job.  Every aspect of this jobs report was good, hourly earnings increased by 0.3% vs. 0.2%, private sector job growth was 268k vs. 200k and February’s number was revised substantially higher from 68k to 235k.  March also was revised for the better to 221k from prior 198k.  Positive revisions for the better indicate an even better hiring environment.  The only negative and I am picking nits here by even mentioning it is the work week was 33.6 vs. an expected 34.3 hours.  What this all means is that employers continued to hire as they were paying existing employees more and this bodes well for consumer spending and GDP as we are a consumer driven economy.  In reaction to the data, the stock markets is moving substantially higher, bonds are selling off and the US dollar is selling off as well, this is a classic risk on trade as a result of a very good jobs number. 

Something's a Miss

I am getting ready for tomorrow’s big April jobs number from the Department of Labor, but am worried about a less than stellar number.  I hope I am wrong and probably am but this week’s ADP private sector jobs number was up by 179k but far weaker than the 200k expected number.  Today’s weekly jobless number ratcheted way to 474k from the expected 400k, this is very unsettling because the downward sloping trendline that has been in place for months now has broken to the upside, this portends a weak hiring environment.  This week’s numbers won’t be included in Friday’s number but makes me worry that the trend did not start this week.  If that is not enough, yesterday’s ISM non-manufacturing came down to 52.8 from last month’s 57.3, this still implies an expanding service sector as any number above 50 is expanding and anything below 50 is contracting.  This is the second month in a row that the service sector has slowed its expansion and that is another reason I am worried that Friday’s number may come in weaker than thought.  I think the US will still create jobs in the private sector and shed jobs in the government arena, that is as it should be however we need to be creating 400k plus jobs a month just to catch up from the recession and while 2  months in a row of 200k job creation is better than a sharp poke in the eye, it is still weak.  I want to be very clear here that I am not bearish on the economy or the markets yet, but my antennae is up for any and all suspicious market data going forward now.  The market is expecting another month of 200k job creation from April, anything short of 175 will add to the selling we have been getting and needing by the way.  If the jobs number is above 240k, then I think we get a relief rally in all risk assets, i.e. stocks, the US dollar  and commodities and selling of US treasuries.  One positive takeaway this week is that the 1^st quarter productivity number rose by 1.6% and unit labor costs rose 1% in Q1 as well.  This means that employers were working their employees harder and having to pay them more in the 1^st quarter than the 4^th quarter of 2010.  This isn’t new news as I have been saying for months that I thought this was happening, it merely confirms my thesis that at some point this year employers will be forced to hire more employees in order to grow.  I just hope that a slowdown in the economy as a result of the Fed stopping the purchases of US Treasury securities doesn’t derail it.  Right now the bond and stock market is telling me that a slowdown or double dip mini recession is more possible now. 

March jobs number tomorrow but is anyone watching?

I posit the question above because as March is sure to follow February, tomorrow’s jobs number is sure to show an increase of jobs again and could be close to 200,000 for the second month in a  row.  However, I am reading and hearing less and less leading up to this announcement as the markets are occupied with “freedom fighting” in North Africa and the Middle East, earthquakes, tsunamis and possible nuclear meltdowns.  This says nothing of the problems in Europe that have not gone away, just on holiday as they say across the pond.  Portugal’s debt was downgraded this week, Spain’s prime minister resigned over a spat with their congress about austerity cuts and the budget.  The world and the financial markets have had a lifetime of black swan events lately and are looking less and less at tomorrow’s number because they expect it to be good, if not then the market which is ripe for a correction may just get one.  My research tells me the governments’ number should be good as the weekly jobless numbers have been dropping for weeks.  This week’s Challenger, Gray and Christmas layoffs number dropped and the CEO roundtable report indicates that companies are poised to hire more employees over the next 6-9 months.  You add to that the good manufacturing and non-manufacturing (service) numbers, low inflation and record corporate profits and you have an economy that is expanding, not rapidly but expanding.  As I have written and said publically for months now, corporations will get to a point where they can’t work their employees any harder even if they pay them more so they have to hire more people to grow their businesses.  Their shareholders may not want them to do this as stocks prices have gone skyward for over a year now as corporate managers have learned to do more with less with the help of technology.  The one odd thing that may happen tomorrow is that the unemployment rate will probably tick up to 9% or higher, why you might ask is this happening as jobs are being created.  The reason is that many people have simply stopped looking for a job so they don’t show up on the jobless survey which makes up the non-farm payrolls report. If they start looking for a job again because they hear things are picking up in the economy, voila, higher unemployment rate as jobs are created.  With every non-farm payroll report, the internals matter, the government will shed jobs as the private sector should show nice increases. 

What's not too like

Good morning everyone, the February jobs report was just released and it shows nice hiring in most areas except local and city governments which lost 30,000 jobs.  The headline number shows a gain of 192k vs an expected 175,000 jobs created and January was revised higher to 63k from 36k.  In strong economic times, all reports are reported for the better not the worse as we are seeing today.  The most important area in my opinion is what happened in the private sector as opposed to the government sector as private businesses added 222k jobs vs an expectation of 198k and January was revised to +68 k from +50k.  One area of pleasant surprise is the unemployment rate which dropped to 8.9% from 9.0% which is a little confusing, but we will take it.  It is confusing because the rate over the last two months is believed to have dropped because many people became frustrated in looking for a job and dropped out of the workforce thereby increasing the rate.  I believe the rate is likely to move back above 9% over the next few months as more people become enthused about job prospects and re-enter the workforce at which point it will eventually head lower for good.  The hourly earnings were flat at 0% vs. an expected increase of 0.2% and the workweek averaged 34.2 hours which is unchanged from January.  This means that employers were not working their employees any longer hours and not paying them more either, this may indicate that the corporate managers may reached the tipping point where they are forced to hire in order to grow their businesses.  The futures market was quite positive before the report and is now trading in negative numbers, I don’t think you should a view Wall Street as being unhappy about the report, rather a buy on the rumor and sell on the news response.  This means that the market has moved nicely higher recently expecting a good report which they got and now they take their profits and hie to the sidelines.  One possible fly in the ointment going forward is the high price of oil and gasoline at the pump, if oil stays high, this crimps the profit margins of companies and may prevent them from hiring.  This also cuts into the spending of consumers as more money is going to gasoline and less in spending.  As much as our economy is 2/3 dependant on consumer spending, then we should be a little concerned if oil stays high and slows down the expansion we are seeing now.