As we talked about on Wednesday, I’m not sure traders really wanted to see a strong jobs number.  And while the number wasn’t exactly strong, only in relative terms really – outright strength would be 300K-plus, the results made those trading simply on Fed liquidity a bit uncomfortable. 

Thus despite the roughly 200K increase in private-sector payrolls, stocks sold off on Friday; although, it was worse before the market pared earlier losses in the final hour of trading.  One can’t of course say unequivocally that the employment data is what drove stocks lower as the minute you think you’re on to something in the current environment that something breaks down.  But for that one day more jobs meant weaker stock prices.   Higher energy prices probably also dragged on traders’ sentiment, but this too comes back to the jobs picture.  When energy prices are already in the process of spiking, more jobs will only advance that move.

Industrials, financials and basic materials led the broad market lower.  Even energy shares underperformed the market despite crude on its horse to $104.50/barrel.  Health-care, consumer staples and utilities were the relative winners. 

For the week, the major indices ended pretty much flat by today’s standards.  The Dow Industrial Average rose 0.33%; the S&P 500 Index added 0.10%; and the NASDAQ Composite gained 0.13%.   The Dow Transportation Average managed to end the week in the green, but only fractionally – up just 0.17; not 0.17%, but 17 hundredths of a point.  We’ll be watching to see if the transports break down again from the industrials.  This occurred on February 18 (the date the S&P 500 hit its multi-year high), but then began to follow the industrials higher again. 

The Dollar Index (DXY) moved lower for the fourth session in five on Friday.  The CRB Index advanced for a sixth-straight session, led by cotton, the precious metals, wheat and the energy complex.  

The greenback is getting absolutely clocked this morning, down to 76.14 on DXY, which puts us dangerously close to that 75 handle.  The last time we touched that mark was in the fall and the DXY quickly bounced back to 81 as the second round of EU debt worries rolled.  But remember the threats of currency war from various emerging-market politicians when we hit that 75 handle, and this time we may not so quickly see the dollar bounce back with the ECB’s Trichet talking about tightening – something that will prove to be more talk than action but that’s all the markets need to keep pressure on the dollar for now.  And this time around import prices are rising at 5.5% annually; they were still in decline back in the fall of 2010 – and the main determinant of import prices is an economy’s domestic currency. 

Market Activity for March 4, 2011

Sector Activity for March 4, 2011

February Jobs Report

The wait is over.  The Labor Department reported that total payrolls rose 192,000 last month (+196K was expected) and private-sector payrolls jumped 222,000 (+200K was expected).  The prior two months were revised up, but just 58K, which is little help considering the lackluster results.  Take the three-month average and headline payrolls are up 136K/month from the +102K in the prior three-month average.

Both goods-producing and service-providing payrolls looked good, but I see some issues (specifically via the education/health services segment) over the next year or so. 

Goods-producing industries added 70,000 positions (+36K is the 3-month avg) as manufacturing increased payrolls by 33,000 (in line with the 3-month avg of +32K) and construction also added 32,000 (the 3-month avg is +2K).  The increase in construction probably had to do with the 22K weather-related layoffs in January – a bounce back. 

Service-providing industries added 152,000 positions (besting the 3-month avg of +116K) as trade and transport sectors increased payrolls by 27,000 (in line with 3-month avg of +28K), business services added 47K (same as 3-month avg) – with 16K being temp workers, leisure & hospitality added 21K (3-month avg is +12K), education & health care added another 40K (3-month avg is +31K).  Retail cut 8,000 positions (3-month avg is +10K) and government shed 30,000 positions (-17K is the 3-mohth avg). 

Referring to the cautious comment above, it is the fact that the education & health services segment has driven employment over the past year that has me a bit concerned.  These jobs are on life support as the federal government continues to pump money to the states.  Those injections are coming to a halt and when you combine that with the state legislative agendas to get finances back in order, one has to think that this segment is going to join government employment in weighing on future payroll numbers. 

The official unemployment rate ticked down to 8.9% from the 9.0% in January as the household survey (which picks up the self-employed) showed an increase of 250,000 jobs, while only 60,000 people re-entered the workforce (1.116 million people left job market in previous six months alone, so +60K is nothing).  I’m thinking my assessment that the rate will bounce back to 10% may be too pessimistic, but by a conservative estimate we have three million people that will re-enter over the next year if the labor market remains on an upswing.  So unless we get 300K-plus/month in payroll growth over the next 8-12 months then the official jobless rate is going to return to 9.5%. 

The long-term unemployment figures show a real problem persists, and this means that skills continue to fall behind.  The U6 unemployment rate (which includes those people who have removed themselves from the labor force) barely improved to 15.9% from 16.1%. 

The duration of unemployment rose to 37.1 weeks from 36.9 weeks in January – a new high.

The percentage of the unemployed who have been out of work for at least six months ticked up to 43.9% from 43.8%.

Also the hours worked and hourly wages figures failed to advance.  Weekly hours held at 34.2 hours, where it’s been essentially stuck for 10 months and average hourly earnings have been flat for four months – these must improve and big time to deal with rising costs (particularly gasoline already at the national average of $3.50 still 12 weeks before Memorial Day). 

Bottom line: 

This is hopefully the beginning of something good for the labor market as we need to get to that +300K/month number for about a year just to keep the jobless rate from rising again, by my estimation.  The Household Survey, which captures the vital self-employed, has printed an increase of 664,000 jobs over the past three months – typically a good indicator of things to come. 

But we still have a long way to go as just 1.3 million jobs have been added back over the past year, very little recovery of the 8.7 million payrolls lost during the destruction.  Add in those that must eventually re-enter the market -- and my 3 million re-entry number above assumes that more than half of those “not in the labor force but wanting a job” (which stands at 6.4 million) will never again look for a job -- and we’ll need a long period of expansion to accomplish full repair. 

In addition, the long-term unemployment situation is acute.  While it will surely improve when the emergency-level of extended jobless benefits expires at the end of the year (forcing most of these people to accept less-than-desirable positions), even substantial improvement will leave these figures at historically high levels.  Further, dealing with fiscal challenges of the states will hit hard and when the federal government injections stop then the education/health services segment (the most consistent driver of past year’s payrolls gains) is likely place a drag on improvement. 

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Have a great day!

Brent Vondera, Senior Analyst