U.S. stocks jumped Friday following a good January jobs report (quite good in terms of the headline number, but so-so in terms of the internals – explained beyond the click), sending the S&P 500 to within 2% of the multi-year high hit on April 29.  The Dow Industrials have made a new multi-year high (going back to May 2008) and the NASDAQ Composite now sits at its best level since December 2000.

It was full risk-on after that jobs report, and a very good ISM reading on the service-sector side of the economy, as financials, consumer discretionary and energy led the charge.  That means utilities, consumer staples and health care were the laggards.

The commodity complex rose, as would be expected during an ebullient trading session, but at least it wasn’t led by higher gasoline or crude futures – the front month contracts for both did increase but the CRB Index runs off of forward-month contracts, which fell.  Leading the index higher were industrial metals and grains.  Precious metals took a hit, as stronger job growth diminishes the chances of more QE.

And on that note, there’s a lot of talk that back-to-back 200K/month prints on payrolls takes QE off the table.  I wouldn’t be so quick in determining such things as 82% of the pop in Household employment was part-time work and the participation rate (the % of the working-age population that is looking for a job) fell to a new 30-year low.

Market Activity for February 3, 2012

Sector Activity for February 3, 2012

January Jobs

The Labor Department reported that total payrolls rose 243,000 in January (whipping the 140K increase that was expected), making for back-to-back 200K-plus prints.  Private-sector payrolls jumped 257,000 (expected at 160K).

And for that private-sector number (which gets the focus these days as government continues to shed workers), the three-month average rises to 199,000/month from the 155,000/month as of December.  This gets us closer to that 300K/month in payroll growth we need, and normally see following a period of such labor-market destruction, such as we saw in 2008-2009.

Good-producing payrolls were en fuego as they jumped 81,000, led by a massive 50,000 increase in manufacturing payrolls -- bringing the three-month average to 28K/month, up from the 14K as of December.  (I hope factories aren’t getting ahead of themselves with corporate profits now on the wane.)  Construction added 21,000 workers after the 31,000 in December – multi-family construction appears to be driving this number. (Wait a minute though, 206,000 people were unable to work due to weather, which is muchless than usual so the seasonal adjustment may have made this number look better than it actually was).  Ignoring that parenthetical, this is a massively positive reversal for the industry, which was still shedding workers as of October.   Mining added 10,000 positions.

Service-sector industries added 176,000 as trade and transport increased payrolls by 37,000, business services added 70,000, education & health increased payrolls by 36,000, and leisure & hospitality added 44,000.  The only groups to cut payrolls were tech, financial services and government.

Government cut another 14,000, down 276,000 over the past year.  For the month, the federal government cut 6,000, local cut 11,000, and state governments added 3,000.

Ok, so the unemployment rate fell to 8.3% from the 8.5% in December even as 508,000 people re-entered the labor force.  I’ve been expecting those re-entries, but thought it would drive the jobless rate higher as the degree of those returning would overwhelm Household employment (a separate survey from the payroll survey, and used to calculate the official unemployment rate).  However, the Household Survey showed a massive 847,000 increase in employment (although 699,000 was part-time – I didn’t see anyone else mention that one), thus the jobless rate fell.  This is the lowest level since February 2009 when the rate was surging from sub-5%.

And the augmented unemployment rate, which includes those who say “they want a job” but didn’t look for one over the past four weeks (a number that the official jobless rate excludes) fell to 11.9% from 12.2% in December.

The strange print in this report was the decline in the participation rate (% of those in the labor force – actively looking for a job -- relative to the working-age population).  The figure fell to 63.7% (a new 30-year low) – 30 years back the rate hovered at a lower level as less women participated in the workforce.

So with an increase in the labor force, more people looking for a job, how did this figure decline?   Well, the latest census data showed we’ve been under-estimating the working-age population.  Thus, the increase in working-age population overwhelmed the increase in the labor force.

This issue will set up in one of two ways.  Either these people eventually return to the labor force and, without consistently strong job growth, the unemployment rate will rise again.  Or, we have more older Americans who will never return to the workforce.  If this occurs, the jobless rate will look better, but fewer workers will be burdened with taking care of more people who are not working.

The long-term unemployment situation was mixed and remains at very troubling levels.

The average duration of unemployment fell to 40.1 weeks from 40.8.

Those out of work for at least six months (as a % of total unemployed) rose to 42.9% from 42.5%

Average hourly earnings ticked up 0.2% in January, yet the year-over-year result lost more ground to inflation as it dropped to 1.9% from the 2.1% as of the previous month – year-over-year inflation is running at 3.0%.  Average weekly hours held at 34.5 – but this didn’t stop just about every journalist I heard and read to state that weekly hours rose.

Yes, manufacturing hours rose a nice 0.3 to 40.9 hours.  But production occupations make up just one segment of hours worked, and a small segment at that at just 6% of the workforce.  In addition, it’s not all that surprising to see production workers enjoying overtime as it has one of the highest unemployment rates of all of the workforce segments at 10.4% -- fewer worker, more hours.

ISM Service Sector

Moving on, the Institute for Supply Management’s gauge of business activity within the service sector posted a nice gain for January.  If this reading is accurate in predicting actual activity, which has become suspect of late, then the personal spending report for the month will show a rebound from October-December flatness; I hope incomes show a similar gain.

Anyway, the ISM reading shot up 3.8 points to a fairly robust 56.8 (best number since February).  New orders rallied to 59.4 from 54.6, a quite strong result; backlog of orders nearly made it out of contraction territory; and employment jumped to 57.4 (one of the strongest levels in the measure’s 15-year history) from the contractionary print of 49.8 in December.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900