Finally, a Jobs Report Worth Reading

Economic Data - Previous Week
Date Series Actual Forecast Prior
3/5 ISM Non-Mfg 56.0 55.0 55.2 Continued growth on sharp gains in new orders & backlog
3/6 Factory Orders -2.0% -2.2% 1.3% Decline driven by aircraft orders; capital goods surge
3/7 Consumer Credit $16.15B $14.70B $15.10B Sharp growth continues to be driven by student loans
3/8 Nonfarm Payrolls 236K 165K 119K Sizeable gain on broad-based strength in the private sector
3/8 Unemployment Rate 7.7% 7.9% 7.9% Improvement driven by job gains & lower participation rate
3/8 Wholesale Inventories 1.2% 0.3% 0.1% Soft sales drives highest stock-to-sales ratio since October
Economic Data - Upcoming Week
Date Series Actual Forecast Prior
3/12 NFIB SB Optimism -- 89.5 88.9 Modest improvement expected off depressed levels
3/13 Import Price Index -- 0.5% 0.6% Higher petroleum prices to drive consistent gains
3/13 Retail Sales -- 0.5% 0.1% Normalized auto sales & higher gas prices to drive gains
3/13 Business Inventories -- 0.3% 0.1% Slight acceleration expected on wholesale accumulation
3/14 Producer Price Index -- 0.6% 0.2% Prices to accelerate on higher food, energy, & medical costs
3/15 Empire Manufacturing -- 8.50 10.04 Slight give-back expected, but new orders to drive expansion
3/15 Consumer Price Index -- 0.5% 0.0% Acceleration expected on higher food & energy prices
3/15 Industrial Production -- 0.3% -0.1% Production to recover on increased production worker hours
3/15 U. of Mich Confidence -- 77.7 77.6 Sentiment to hold steady as higher taxes offset improved econ
Source: Bloomberg


Equity markets continued their trek into record territory, with the S&P 500 index and the Dow Jones Industrial Average gaining 2.2% for the week.

Most of the economic news last week leaned bullish, driving equities markets higher each trading day. Most importantly, Friday’s labor report painted a brighter employment backdrop, while the ISM Non-Manufacturing index rose more than projected.

On Tuesday, the ISM Non-Manufacturing index rose from 55.2 to 56.0. Readings above 50 are indicative of growth in the service sector. Strength was evident in new orders, business activity, and exports. Unlike its manufacturing counterpart, the non-manufacturing report has remained in expansionary territory for some time now, providing ongoing support for the economy. With the new orders component jumping from 54.4 to 58.2, there is good reason to believe forward momentum will stay positive.

Source: Bloomberg

Thursday’s consumer credit report showed an increase of $16.1 billion in January, a further acceleration from the $15.1 billion increase in December. Non-revolving credit accounted for nearly the entire uptick, representing $16 billion, with revolving credit (i.e. credit cards) making up the remaining $0.1 billion. As we discussed last week, student loans make up a rising portion of outstanding consumer debt, and that remained the case in January.

Source: Bloomberg

The Federal Reserve’s Beige Book, which measures economic activity throughout the country, showed a “modest to moderate pace” of economic growth in recent weeks.

There was mostly positive news to report, but the Fed highlighted several developments that bear caution.

Buried in its comments, the Fed noted that “contacts commented on the expired payroll tax holiday and the Affordable Care Act as having restrained sales growth.” In addition, rising retail gas prices inhibited consumer spending.

Overseas, a number of prominent central banks held policy meetings last week. The two highest profile meetings were the Bank of England and the European Central Bank, but no new information was reported from either of those meetings. ECB President Mario Draghi maintained his supportive stance and said rates would remain accommodative, “as long as needed.” There were a few changes in emerging market policies, with Poland reducing its rate from 3.75% to 3.25% and Mexico cutting its rate from 4.5% to 4.0%.

According to Central Bank News, there have been 91 policy decisions made since the start of the year: 21% resulted in interest rate cuts, while the other 76% were no change to rates. In general the preference of global policy still favors easing, but at a slower pace relative to last year.

Finally, A Jobs Report Worth Reading

Surprisingly, the February employment report showed a labor market growing at a reasonably healthy rate. Concerns that the sequester would spill into the broader economy have yet to materialize and if recent trends hold, the economy may finally be approaching a point of robust and sustainable job growth.

Recapping the details, labor markets grew 236,000 in February and the unemployment rate dropped form 7.9% to 7.7%. However, revisions to January’s report revised job growth slightly lower.

For the most part, the details of February’s report were positive. The best performing sectors were construction (+48,000), business and professional services (+73,000), education and healthcare (+24,000), leisure and hospitality (+24,000) and retail (+24,000). February marked the best month of construction-related job growth since March 2007, supporting the notion that housing is finally breaking out of its longstanding downtrend.

Source: Global Macro Monitor

Two other encouraging pieces of this report were hours worked and wages. The average workweek climbed 0.1 to 34.5 hours, but more importantly average hourly earnings rose 0.3%, marking the fourth consecutive month of gains. In the past year, earnings have risen 2.0%, accelerating from the 1.5% growth rate experienced in 2012. Wages have remained an area of concern for many Americans given the steady rate of deceleration since the recession.

Source: Economist’s View

A number of market pundits pointed out one unusual occurrence in recent reports, including Felix Salmon at Reuters. Felix noted that February’s report showed 340,000 people reported taking on a second or third job. When considering the 236,000 headline number, this suggests that more than 100% of February’s job growth was attributable to people picking up second or third jobs.

This also highlights the importance of watching the employment-population ratio. In February, 58.6% of the population held a job, only slightly higher than the post-recession low of 58.2%.

Source: Center on Budget and Policy Priorities

February was clearly a more encouraging report for the labor markets, but there are still persistent headwinds that are unlikely to abate for years to come. This is likely to keep the Fed accommodative and economic growth at its recent trend rate.

The Week Ahead

The domestic news flow is quieter this week, chiefly focused on inflation data, the job openings and labor turnover (JOLT) report, and industrial production.

Central banks meeting this week include those in New Zealand, South Korea, Philippines, Switzerland and Norway.

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