U.S. stocks closed slightly higher Friday, ending the week up strong, as traders weren’t fazed by a disappointing January payroll report.  To be fair, there were faint signals of job growth ahead, but like we need it anyway – a weak jobs number only increases the chance of more QE and thus a greater shot at short-term trading profits; it’s a nasty game that I wish we’d never have gotten into, but such is life.

Tech and consumer shares (both discretionary and staples) led the broad market higher.  Utilities, energy and financials were the biggest losers. 

For the week, the Dow Industrial Average climbed 2.27%; the S&P 500 gained 2.71%; and the NASDAQ Composite rallied 3.07%.  Mid-cap stocks, as measured by the S&P 400 added 2.97% for the week and smalls, as measured by the Russell 2000, rose 3.19%.  (The other major small-cap index, the S&P 600, added 2.62%.)

Treasury yields were on the move last week to break out of the recent trading range.  Take the 10-year for instance, up nearly 30 basis points for the week to yield 3.64%.  Now, these are hardly high levels, and still well below the levels hit just nine months ago, but the moves are significant.   Does this move signal that inflation fears beginning to boil up, as everyone is talking about?  One does see the beginning of the market becoming concerned of this risk, but until yields break out of that April 2010 level (4.00% on the 10-year) it’s kind of difficult to make that assumption.  And the bond market surely understands the next round of housing-market trouble is around the corner as more distressed properties flood the market after the late-2010 foreclosure moratorium. 

Market Activity for February 4, 2011

Sector Activity for February 4, 2011

We’ll Keep Waiting

Friday’s jobs report showed that meaningful job growth has yet to arrive.  Not only are we trending below the 150K/month needed just to keep the unemployment rate steady when the marginally-attached workers (those not officially counted as unemployed because they haven’t been looking for work) begin to actively look for employment again, we’re running about a third of the 300K/month needed to reduce the jobless rate in a reasonable timeframe. 

Here’s the short of it:

The Labor Department reported that total payrolls rose only 36,000 in January (146K was expected) with private-sector payrolls up just 50,000 (145K was expected).  This does come off of a higher revision to the December report – total payroll growth was up 18K to 121K and private revised up 28K to 139K; still much too weak though.  The annual revision was down 215K. 

Economists who were calling for a 200K-plus increase for January blamed the disappointment on the weather.  I’m sure this is true to some extent (but their estimates should have factored that in).  Construction employment, obviously the segment most affected by the weather, fell 32K last month.  However, it’s been in decline since 2007 (with or without weather events) and even if that -32K number had a positive sign in front of it, you still get less than 100K in payroll growth for the month.

On the positive side, manufacturing employment was strong, up 49K (best monthly increase since 1998), and two months of increase within the Household Survey (full-time employment cemented its second month of increase too) may signal an acceleration in payroll growth a couple of months out.

The unemployment rate slid to 9.0% from 9.4%, but that was because a massive 504,000 people removed themselves from the labor force – the jobless rate is going to test that 10% level again as there are possibly four million people that will eventually return to the labor market.  (The pool of available labor is at 20.27 million.  Subtract that from the 13.86 million officially unemployed and you get 6.4 million people that would technically have to return to the workforce.  Now, some of these people will simply retire, but I’m assuming a conservative estimate is there will be four million returning – and that doesn’t count population growth or college grads).  

To the specifics:

Goods-producing industries added 18,000 positions thanks to that really nice 49,000 increase within the manufacturing sector (three-month average is +26K).  That confirms the ISM employment reading for the month.

Service-providing sectors added just 32,000 positions.  Trade & Transport cut 3,000 (probably weather-related); retail trade added 28,000; finance cut 10,000; business services added 31,000 (and all permanent as temp hiring fell 11K); leisure & hospitality payrolls fell 3,000; and education & health care added another 13,000.

Government cut 14,000 positions, almost all from state & local government – and this is just the start of it. 

So take the three-month average of payroll growth and we’re at 83K/month.  Over the past 12 months we’ve averaged 109K/month.  Looks like QE∞ is in our future.

The unemployment rate fell to 9.0% from 9.4%. This marks the second month of decline but it’s been because a huge 764,000 people have removed themselves from the labor force over this timestep, which has overwhelmed the 414,000 increase in household survey employment (the survey that is used to calculate the jobless rate). 

The household survey captures the self-employed, something the headline survey misses.  The average of 207,000/month in household employment over the past two months is a good early indicator that we’ll get better payroll number in the months ahead.  Further, the number of full-time jobs rose 612,000 in January (second month of increase).  Part-time employment has been dragging as it’s down 693,000 over the past two months.  We’ll still have to wait another two reports to see if this is a true signal as household employment is net down over the past four months.  While the weather can cause payrolls declines in some areas, it likely boosts the self-employed workforce (snow removal).   Thus, the latest gains within the Household Survey may prove to be transitory.

The long-term unemployed figures were mixed as the U6 unemployment rate (those working part-time because they can’t find full-time work and those not captured by the official jobless rate because they removed themselves from the labor force) slipped to 16.1% from 16.7%.

However, the average duration of unemployment jumped to 36.9 from 34.2 weeks. 

Average hourly earnings rose a nice 0.4% last month to $22.86 (the increase in factory jobs was behind that), but average weekly earnings rose only 0.1% to $781.81 as the average weekly hours worked figure fell 0.3%.  One would look at the 0.4% increase in hourly earnings as a really nice improvement, but considering weekly hours fell (which may have been weather-related) the earnings figures on the whole were a wash. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900