Solid Jobs Report = Fed Rate Hike

The government said that the U.S. economy added 211,000 jobs in November, which was the high-end of the predicted range of 160,000-220,000. There is now little doubt that the Federal Reserve will raise short-term interest rates when it meets in a week and a half. The three-month average of job creation stands at a solid 218,000 and year-over-year, 2.64 million jobs were added. Although 2015 average monthly job creation of 210,000 is less than last year’s strong pace of 260,000, it has certainly been strong enough to push down the unemployment rate from 5.8 percent a year ago, to a seven-year low of 5 percent. The broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged up slightly to 9.9 percent, though remained under the key 10 percent level for a second consecutive month.

The Fed is also likely to be encouraged by the breadth of job gains, including the domestic-focused construction, retail and health care sectors. That said, two areas that continue to be under pressure are mining and manufacturing, both of which have been struggling under the triple whammy of lower oil prices, weak demand overseas and a stronger U.S. dollar. Another area of weakness is the still low level of working-age Americans who have jobs or are actively looking for work. The participation rate edged up to 62.5 percent, due to a 273,000 increase in the labor force, but because of demographics and the large number of would-be workers giving up their job searches, participation remains near 40-year lows.

Back to the good news...after a swift 2.5 percent annual increase in October, wages in November were up a still-respectable 2.3 percent from a year ago. In a separate report released by the government earlier last week, Q3 hourly compensation jumped by 4 percent in the third quarter, on an annualized basis and was up 3.6 percent compared to the same quarter a year ago. If that trend holds, hourly compensation is on track to rise by the largest amount since 2007 and when adjusted for inflation, the increase would be the fastest since 2000.

Overall, the results confirm that the economy continues to expand; the labor market is improving and workers are gaining leverage; and the Fed will soon hike interest rates for the first time in over nine years.

MARKETS: The US jobs report, along with promises of “no limit” on additional ECB stimulus measures, was enough to save what was shaping up to be a losing week.

• DJIA: 17,847 up 0.3% on week, up 0.1% YTD
• S&P 500: 2,091 up 0.01% on week, up 1.6% YTD
• NASDAQ: 5,142 up 0.3% on week, up 8.6% YTD
• Russell 2000: 1183, down 1.6% on week, down 1.8% YTD
• 10-Year Treasury yield: 2.28% (from 2.22% a week ago)
• Jan Crude: $39.97, down 4.2% on week
• Feb Gold: $1,084.10, up 2.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.05 (from $2.09 wk ago, $2.79 a year ago)

THE WEEK AHEAD: December 9^th marks the 50^th anniversary of the debut of “A Charlie Brown Christmas”. The image of the sad little Christmas tree that Charlie and Linus selected may be a good symbol of the U.S. economy. At first glance, it seems a little thin and wobbly, but upon further reflection, it’s not “such a bad little tree. It's not bad at all, really. Maybe it just needs a little love.”

Mon 12/7:

Tues 12/8:

6:00 NFIB Small Business Optimism

10:00 Job Openings and Labor Turnover (JOLTS)

Weds 12/9:

Thursday 12/10:

8:30 Import/Export Prices

Friday 12/11:

8:30 Retail Sales

8:30 PPI

10:00 Business Inventories

10:00 Consumer Sentiment

Holiday Shopping 2015

With Halloween in the rear-view mirror, it’s time to talk HOLIDAY SHOPPING 2015 -- now that’s scary! The always-dubious National Retail Federation (NRF), the industry cheerleader, is predicting a 3.7 percent increase in holiday spending. As Barry Ritholtz has noted, “the methodology employed by the NRF survey is defective, because it relies on asking consumers how much they spent last year, and how much they plan on spending this year.” Of course, people have “no idea what they spent last year. No clue whatsoever,” which is why “the track records of these surveys are awful.” So what’s really going on for consumers, as we head into the final two months of the year? Although wage gains have been paltry, low prices overall (health care costs not withstanding) have amounted to extra money in the wallets of most Americans. They are spending some of that money on long lasting goods, like cars, as well as services; and also saving at a decent 4.8 percent rate.

The dual trends of pokey wage increases amid low inflation encouraged the Fed to maintain 0 - 0.25 percent interest rates at its meeting last week, but the central bankers also left the door open to a possible rate hike at the final policy meeting of the year. Before that confab, there will be two more employment reports: one this week and then another on the first Friday in December. What might get the Fed to act in December is a pick up in job creation and wages. The prior three months has seen an average monthly gain of just 167,000, down from the nearly 200,000 this year and annual wage gains have been stuck at 2 - 2.2 percent.

Economists expect that 175,000 – 185,000 jobs were created last month at that the unemployment rate will remain at 5.1 percent. The Fed may also keep an eye on the participation rate (the number of Americans working or actively seeking employment), which dropped to a 40-year of low of 62.4 percent in September.

According to Capital Economics, most of the 4.5 percent decline in the rate from the peak of 67.3 percent in 2000 is due to the aging of the population (1.8%), rising disability (1.2%) and an increase in post-secondary education enrolment (0.9%), there will continue to be a chorus of commentators, who will cite participation rate as a rationale for the nation’s woeful job market. It may be helpful to know that just 0.6 percent of the decrease should be attributed to the recession. “It is notable that, even with the job openings rate at a record high and the unemployment rate within touching distance of the long-run natural rate, the participation rate continues to trend relentlessly lower.”

MARKETS:

• DJIA: 17,663 up 0.1% on week, up 8.6% on month, down 0.9 YTD
• S&P 500: 2,079 up .2% on week, up 8.3% on month, up 1% YTD (best month in 4 yrs)
• NASDAQ: 5,053 up 0.4% on week, up 9.2% on month, up 6.7% YTD
• Russell 2000: 1161, down 0.4% on week, up 5.9% on month, down 3.6% YTD
• 10-Year Treasury yield: 2.09% (from 2.03%)
• December Crude: $46.59
• December Gold: $1,141.40
• AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.21 wk ago, $3.00 a year ago)

THE WEEK AHEAD:

Mon 11/2:

9:45 PMI Manufacturing Index

10:00 New Home Sales

10:00 Construction Spending

Tues 11/3:

Motor Vehicle Sales

10:00 Factory Orders

Weds 11/4:

8:15 ADP Private Jobs Report

8:30 International Trade

10:00 ISM Non-Manufacturing Index

Thurs 11/5:

8:30 Productivity

Fri 11/5:

8:30 October Employment Report

3:00 Consumer Credit

Dec Jobs Report: Dude, Where’s My Raise?

It’s official: 2014 was the best year for job growth since 1999, with a total of 2.952 million non-farm jobs created. The Labor Department reported that the U.S. economy added 252,000 jobs in December and the unemployment rate dropped to 5.6 percent, the lowest level since June 2008. That said, the labor market still remains in the healing phase for at least these four reasons:

1. We Ain’t there yet: The Hamilton Project at the Brookings Institute examines the “jobs gap,” which is the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels while also absorbing the people who enter the potential labor force each month. To keep up with population growth since the recession began, the economy would need to create about 4.6 million additional jobs.
2. Broad Unemployment Rate is still high: The headline unemployment rate of 5.6 percent is awfully close to the average of 5.5 percent recorded from 1990 – 2006. But the broader unemployment rate (the BLS statistic known as “U-6”, which includes official rate, plus marginally attached workers, those who are neither working nor looking for work, but want a job and have looked for work recently; and people who are employed part-time for economic reasons), stood at 11.2 percent at the end of 2014. While that is down from the 13 percent from a year ago and way down from 17.1 percent seen in April 2010, it is still above the 8 to 9 percent readings observed before the recession started.
3. Whither the American Worker? The participation rate, which counts the number of Americans who are employed or actively seeking a job, fell to a fresh 36-year low of 62.7 percent. Before the recession started, 66 percent of the working age population either had a job or was looking for one. Economists estimate about half of the drop is attributed to baby boomers retiring, but the other half is likely due to the severity of the recession and something that economists call “labor market scarring,” which means that when some people lose their jobs amid a deep downturn, they find other ways to survive, including relying on friends and family; claiming disability or working under the table.
4. Dude, Where’s My Raise? Average hourly earnings fell by 0.2 percent in December from the prior month, which put wage growth at just 1.7 percent annually, (Thankfully, because of the big drop in oil and gas, inflationis running at 1.3 percent from a year ago.) In previous expansions, wage growth averaged 3 to 3.5 percent.

Just days ahead of the December jobs report, the Federal Reserve Bank of San Francisco released a paper asking “Why Is Wage Growth So Slow?” (I asked a similar question six months ago, “When Will Americans Get a Raise?”) Authors Mary C. Daly and Bart Hobijn note, “A prominent feature of the Great Recession and subsequent recovery has been the unusual behavior of wages.” At this point you may want to exclaim, “NO KIDDING” or some other expletive, but what was really unusual about the most recent recession, according to the research, is that more workers did not take STEEPER wage cuts.

In past recessions, companies cut wages and then subsequently raised them amid upturns. But in the past three recessions, Corporate America minimized wage cuts and instead laid-off more workers. The goal was to keep the remaining workers happy. Who knew that those who kept their jobs had it better than they thought?

Because many firms did not reduce wages during the recession, “they must now work off a stockpile of pent-up wage cuts.” And because “it takes some time to fully exhaust the pool of wage cuts, wage growth remains low even as the economy expands and the unemployment rate declines.”

That’s why despite putting up the best year for job creation since 1999, wage growth continues to be disappointing. “Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.” Fed economists say wage growth should slowly pick up, as the labor market tightens and companies are forced to pay up for talent. American workers are waiting...

MARKETS: If the first week of the year is a harbinger for the rest of 2015, we better fasten our seat belts, because it's going to be a bumpy ride.

• DJIA: 17,737, down 0.5% on week, down 0.5% YTD
• S&P 500: 2045, down 0.6%, down 0.7% YTD
• NASDAQ: 4704, down 0.5%, down 0.7% YTD
• Russell 2000: 1185, down 1.1% on week, down 1.6% YTD
• 10-Year Treasury yield: 1.97% (from 2.12% a week ago)
• February Crude Oil: $48.36, down 8.2% on week (7^th consecutive weekly loss)
• February Gold: $1,216.10, up 2.5% on week
• AAA Nat'l average price for gallon of regular Gas: $2.14 (from $3.32 a year ago)

THE WEEK AHEAD: What’s the upside of stagnant wages? It’s good for corporate profitability. This week kicks off quarterly earnings season and the estimated year-over-year earnings growth rate for S&P 500 companies in Q4 is 1.1 percent, according to Factset. Analysts will also be keeping a close tab on those companies that are either hurt by or benefit from lower oil prices.

Mon 1/12:

Alcoa

Tues 1/13:

7:30 NFIB Small Bus Optimism

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Weds 1/14:

JP Morgan Chase, Wells Fargo

8:30 Dec Retail Sales

2:00 Fed Beige Book of Economic Conditions

Thurs 1/15:

Citigroup, Bank of America, Schwab, Schlumberger, Intel

8:30 Weekly Jobless Claims

8:30 Producer Price Index

8:30 Empire State Manufacturing Index

10:00 Philadelphia Fed Survey

Fri 1/16:

Goldman Sachs

8:30 Consumer Price Index

9:15 Industrial Production

9:55 Consumer Sentiment

Goldilocks Jobs Report for the Fed

The economy bounced back and created a better than expected 248,000 jobs in September and upward revisions for the previous two months amounted to an additional 69,000 jobs than previously reported. Coming into the fourth quarter, 2014 monthly job creation has averaged 227,000, up 17 percent from last year’s pace. According to Bill McBride at Calculated Risk, we should be partying like we’re Prince, because this year is on pace to be the best year for both total and private sector job growth since 1999. The unemployment rate dropped to 5.9 percent, the lowest level since July 2008, due to a combination of 232,000 people landing jobs and 97,000 would-be workers dropping out of the labor force (more on those drop-outs in a bit.) Adding to the good news, the broad unemployment rate, which includes the official rate, plus marginally attached workers (those who are neither working nor looking for work, but want a job and have looked for work recently); and people who are employed part-time but want full time work, fell to 11.8 percent, the lowest level since 2008.

But nearly seven years since the start of the recession, there are signs that the labor market is not fully healed. There are still 3 million Americans who have been out of work more than six months, which is down from a recession high of 6.7 million, but is still almost 50 percent higher than its highest pre-recession level on record; the participation rate, which tallies the number of people working or actively seeking a job, fell to 62.7 percent, the lowest level since February 1978; and average hourly earnings have increased by just two percent, matching the pace of inflation.

The not-too-hot, not-too-cold jobs report jibes perfectly with the Federal Reserve’s monetary policy. Yes, growth is accelerating, which is why the central bank will complete the wind-down of its bond buying at the end of this month. But the noticeable “slack in the labor market” as evidenced above, justifies the Fed’s decision to keep a lid on interest rates…and of course, stock investors liked that a great deal, making the week a losing one, but not an horrible one.

Speaking of the Fed, economists are atwitter over a new monthly data release, called the labor market conditions index, which will dig into labor market trends beyond the standard monthly unemployment rate measure. The central bank will release the updated data on the first business day following the monthly employment report and the first release will occur on Monday. Warning: according to the Fed, the LMCI is a staff research product and not an official statistical release and could be subject to “delay, revision or methodological changes without advance notice.”

It will be a relatively quiet week on the economic calendar, but let me be the first to wish you a Happy Financial Planning week! The Financial Planning Association created the week in order to raise awareness about the importance of the financial planning process. To celebrate, check out this week’s “Jill on Money” radio show, with special guest Kevin Keller, the CEO of the Certified Financial Planner Board of Standards!

MARKETS: It coulda’ been worse...a better than expected jobs report rescued what was shaping up to be a very bad week.

• DJIA: 17,009 down 0.6% on week, up 2.6% YTD
• S&P 500: 1968, down 0.8% on week, up 6.5% YTD
• NASDAQ: 4475, down 0.8% on week, up 7.2% YTD
• Russell 2000: 1104, down 1.3% on week, down 5% YTD
• 10-Year Treasury yield: 2.45% (from 2.53% a week ago)
• November Crude Oil: $89.74, down 4.1% on the week (down 16% from mid-June high)
• December Gold: $1192.20, down 3.9% on the week (lowest since Aug. 3 2010)
• AAA Nat'l average price for gallon of regular Gas: $3.31 (from $3.37 a year ago)

THE WEEK AHEAD:

Mon 10/06:

Tues 10/7:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

10:00 Consumer Credit

Weds 10/8:

Alcoa

2:00 FOMC Minutes

Thurs 10/9:

8:30 Weekly Jobless Claims

Fri 10/10:

8:30 Personal Income and Spending

Here Comes Holiday Season 2014

As the third quarter ends and investors tally returns, attention will once again return to the more mundane issues, like job creation, economic growth and of course, the all-important holiday season. Economists predict that companies stepped up the pace of hiring to 215,000 from the softer than expected August result of 142,000 and the unemployment rate is likely to remain at 6.1 percent. September numbers should be helped by the return to work of up to 25,000 workers at the New England grocery store Market Basket who walked out in late July. However, some of that effect will be offset by the recent closure of a number of large casinos in Atlantic City, which should reduce employment by 6,500. Regardless of these month-to-month fluctuations, the positive trend remains in tact. Most of the business surveys indicate that labor conditions have improved, households are saying that jobs are more plentiful and initial jobless claims are close to a 14-year low.

Despite the improvement in the labor market over the past year, the effects of the Great Recession are still impacting many Americans. According to a report from Rutgers University, more than 20 percent of those who were laid off over the past five years are still unemployed; and one in four who found work, is stuck in a temporary job. Of those who were lucky enough to land a new position, 46 percent say they had to take a pay cut and 44 percent reported a drop in status.

For those who kept their jobs, wages have remained largely flat and that may be due to the fact that many companies chose the more palatable option of freezing, rather than cutting wages during the recession. Because they did not lower wages during the downturn, employers have been slower to increase them as the economy has improved. The good news is that this condition can only last for so long. As the economy improves, the competition to attract and retain employees will increase and wages will rise.

If job creation and wage growth improve, that leaves one more area of concern for the labor market: the participation rate. Participation rate, or the number of American workers employed or actively seeking work, has been bumping along 35 year-lows of 63 percent, with no sign of picking up any time soon. Fed Chair Janet Yellen has noted that the low participation rate is one of the signs of “slack in the labor market”. Specifically, economists worry about the percentage of prime-working-age Americans, those between 25 and 54, who are in the labor force. As of this summer, the percentage fell to a 30-year low and for prime-working-age men, the number has dropped to the lowest reported since the government began computing the figure in 1948.

At issue is why all those people are not in the labor force. Research by the Cleveland Federal Reserve Bank attributes nearly half of the decline in participation since 2007 to aging, while 10 to 35 percent may be attributable to a weak labor market. That means that even if the labor market were to substantially improve, the participation rate may remain low over the longer-term, which the research defines as a decade. The research may mean that Fed policy makers may want to be careful about using a low participation rate as a rationale for keeping rates low.

Beyond jobs, the big focus as the economy enters the final quarter of the year will be consumers. The holiday season could turn out to be better than in the past if the job market and the economy gain steam. Last week, the first of the holiday sales predictions was released: Deloitte sees a sales increase of between 4 to 4.5 percent from November through January. That would be a modest improvement over last year's 2.8 percent gain to $944 billion, according to U.S. Commerce Department data that excludes auto and gasoline sales. But the mood and behavior of consumers has been mercurial throughout the recovery. Unless there is a consistent, positive change in conditions, any end of year euphoria may have to wait until 2015.

MARKETS: It was the worst week for stocks in nearly two months. Bears will point out that the Russell 2000 index of small stocks is close to correction territory (down 8.5% from the summer highs), while the bulls will note that the small and momentum stocks had similar movements lower in the spring, only to fake out investors by bouncing back swiftly.

• DJIA: 17,113 down 1% on week, up 3.2% YTD
• S&P 500: 1982, down 1.4% on week, up 7.3% YTD
• NASDAQ: 4512, down 1.5% on week, up 8% YTD
• 10-Year Treasury yield: 2.53% (from 2.58% a week ago)
• November Crude Oil: $93.54, up 2.1% on the week
• December Gold: $1215.40, down 0.1% on the week (lowest close since Dec 31, 2013)
• AAA Nat'l average price for gallon of regular Gas: $3.34 (from $3.42 a year ago) By the end of the year, up to 30 states could have an average gasoline price of less than $3/gallon, according to a recent GasBuddy forecast

THE WEEK AHEAD:

Mon 9/29:

8:30 Personal Income and Spending

10:00 Pending Home Sales

Tues 9/30:

9:00 Case Shiller Home Price Index

9:45 Chicago PMI

10:00 Consumer Confidence

Weds 10/1:

Automobile Sales

8:15 ADP Private Payrolls

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

Thurs 10/2:

7:30 Challenger Job Cuts

8:30 Weekly Jobless Claims

10:00 Factory Orders

Fri 10/3:

8:30 Sep Employment Report

8:30 International Trade

9:45 PMI Service

10:00 ISM Non-Manufacturing

Sell in May and Go Away?

Is the US economy finally back to a "normal" jobs market? Unfortunately, not yet. At first blush, the employment report was much better than expected, but pessimists found plenty to highlight as well. First the good news: The economy created 288,000 jobs in April and there were upward revisions to the previous two months, amounting to an extra 36,000 jobs than were previously reported. Total monthly job creation over the past three months has averaged 238,000, an improvement over the past year’s pace of 190,000.

Additionally, the unemployment rate dropped to 6.3 percent, the lowest level since September 2008, but most of the decline had to do with a massive 806,000 reduction in the labor force, which pushed down the participation rate (the number of people employed or actively seeking employment) to 36-year lows of 62.8 percent. Still, while the monthly results on the rate might seem discouraging, the folks at Capital Economics remind us, “The labor force has increased by about 1.5 million over the past six months.”

As most know, the top-line unemployment rate only captures those who have a job or are actively looking for work. A broader measure of joblessness, which includes those who have stopped looking for work as well as people working part-time for economic reasons, fell to 12.3 percent, which is certainly an improvement 13.9 percent from a year ago, but still very high.

The ranks of the long-term unemployed continued to show progress, dropping by 287,000 in April to 3.5 million. Over the past year, the number of long-term unemployed has decreased by 908,000 and the median duration of unemployment dropped to 16 weeks, which is down from 20 weeks a year ago and half the amount of time it took to land a new job at the worst part of the jobs recession. Still, from 1994 through 2008, roughly half of all unemployed jobseekers found jobs within 5 weeks, which shows that the labor market remains far from normal.

There has also been concern about quality of jobs created during the recovery. Nearly five years after the end of the recession, job growth is still heavily concentrated in lower-wage industries. The food services and drinking places, administrative and support services (includes temporary help), and retail trade industries continue to lead private sector job growth during the recovery.

The addition of low-wage jobs is keeping a lid on average hourly earnings, which were unchanged last month and the annual growth rate of hourly earnings slipped back to 1.9 percent from 2.1 percent. Before the recession, wages were regularly growing at above 3 percent year-over-year. Wage growth and an increase in hours worked are the necessary components to help consumers feel confident enough to eventually pick up their spending.

What’s the bottom line? The labor market is improving, but we are not there yet, which may be why markets barely budged on the news. Or maybe it’s something else…could investors be thinking about the old trader’s chestnut, “Sell in May and Go Away” The market-timing strategy says investors should get out of stocks in May, avoiding the volatile spring and summer months; and then jump back in after October to enjoy an end of the year rally. There is some statistical evidence to back the adage. According to S&P Capital IQ (as cited in the Wall Street Journal), since 1977, the S&P 500 has averaged a total return, including dividends of 3.3 percent from May through October. That performance dramatically lags the Barclays Aggregate Bond Index, which has averaged a 7.6 percent gain during those same months for the past 36 years.

Skeptics brush aside the idea as a trading trap, warning investors to stick to their long-term game plans. After all, while the data may confirm a trend, in any year the results might change. Last year, the S&P 500 jumped 10 percent from May through October, so selling in May and going away would have been a terrible strategy. Bottom line: ignore the rhymes and stick to your diversified, balanced portfolio!

But there may be other reasons to consider taking a hard look at your asset allocation and ensuring that your stock position is not too weighty. Consider the front-page Wall Street Journal headline, “Retirement Investors Flock Back to Stocks,” which highlights new data from Aon Hewitt showing that stock investments accounted for two thirds of employees' new contributions into retirement portfolios in March, the highest percentage since March 2008! Um, contra-indicator, anyone? This could be a case where retail investor enthusiasm may come at a market top.

After all, it’s been three years since the S&P 500′s last correction began. On April 29, 2011 the S&P 500 started a long and volatile decline from 1363.61, which ended five months later (on October 4) and 19.9 percent lower (1099.23). Since then, there have been five pullbacks of more than 5 percent but less than 10 percent. The biggest of those declines was a 9.9 percent drop that lasted from the April 2, 2012 close through June 1, 2012.

MARKETS:

• DJIA: 16,512, up 0.9% on week, down 0.4% YTD
• S&P 500: 1881, up 1% on week, up 1.8% YTD
• NASDAQ: 4123, up 1.2% on week, down 1.3% YTD
• 10-Year Treasury yield: 2.59% (from 2.66% a week ago, lowest yield of year)
• June Crude Oil: $99.76, down 0.8% on week
• June Gold: $1302.90, up 0.1% on week
• AAA Nat'l average price for gallon of regular Gas: $3.68 (from $3.52 a year ago)

THE WEEK AHEAD:

Mon 5/5:

Pfizer, AIG

10:00 ISM Non-Manufacturing Index

Tues 5/6:

Disney, Whole Foods, Groupon

8:30 International Trade

Weds 5/7:

A-B InBev, Tesla, AOL, Zillow

8:30 Q1 Productivity

10:00 Yellen Testifies before Joint Economic Committee

3:00 Consumer Credit

Thurs 5/8:

News Corp, CBS

7:30 ECB/BOE Interest rate decision

Chain Store Sales

8:30 Weekly Jobless Claims

10:00 Yellen Testifies before Senate Budget Committee

Fri 5/9:

Ralph Lauren

10:00 Wholesale Trade

10:00 JOLTs

Week Ahead: Labor Market Has Work to Do

The US economy created far fewer jobs than expected in December – just 74,000, the smallest number since January 2011. The unemployment rate dropped to 6.7 percent, the lowest since October 2008, but the rate went down for the wrong reason - it was largely due to 347,000 would-be workers leaving the labor force. That pushed down the participation rate (the number of people actively looking for a job or employed) to a 35-year low of 62.8 percent. (As a point of reference, the participation was about 66-67 percent over the last 20 years. A large portion of the drop (as much as one-half to two-thirds) is attributable to demographics, i.e. Baby Boomers retiring). Considering that analysts were predicting 200,000 jobs created and that the participation would increase, you are not alone in asking, “What happened?”

Some economists noted that the big miss was due to unseasonably severe winter weather last month. The Bureau of Labor Statistics attempts to adjust its findings for seasonal factors. But since more snow fell than in a normal December, the adjustment may have lagged reality. The government’s household survey showed that 273,000 people reported not being able to work because of the weather in December, that’s well above the long-term average of 166,000 for the final month of each year. The folks at Capital Economics said, “It’s even possible that some people who couldn’t get to work were incorrectly recorded as unemployed rather than employed.”

Doubters contend that bad weather should not matter, because the government still counts workers as employed as long as they were paid for one day in the sample period, regardless of whether they turned up. Hard to say, but eyeballing the 16,000 decline in construction and the drop in average weekly hours worked, chances are that bad weather played some role. If that’s the case, then the next few months should show a pickup, as the chill from the Polar Vortex (and all other unnamed weather patterns) pass.

For now, the labor market still has work to do…

Now that the jobs report is behind us, it’s time for earnings season! Fourth quarter earnings for all S&P 500 companies are expected to rise by 6.1 percent, according to FactSet, compared to a 5.1 percent increase in the third quarter. Earnings estimates are down since September 30^th, with the energy sector seeing the largest cut. It’s the financial sector that is expected to lead the way, with earnings expected to rise by over 20 percent.

On the economic calendar, December retail sales will provide a closer look at the holiday shopping season. Last week, ShopperTrak said that sales were up 2.7 percent from a year ago in brick-and-mortar stores, despite a steep drop in traffic, which fell 14.6 percent. Separately, low-end retailers Dollar Stores and Sears reported that their customers continue to struggle economically and as a result; the holiday season was a bust.

MARKETS:

• DJIA: 16,437, down 0.2% on week, down 0.8% YTD
• S&P 500: 1842, up 0.6% on week, down 0.3% YTD
• NASDAQ: 4174, up 1% on week, down 0.05% YTD
• 10-Year Treasury yield: 2.86% (from 2.99% a week ago)
• Feb Crude Oil: $92.72
• Feb Gold: $1246.90
• AAA Nat'l average price for gallon of regular Gas: $3.31 (from $3.31 a year ago)

THE WEEK AHEAD:

Mon 1/13:

Tues 1/14:

JPMorgan Chase, Wells Fargo

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Weds 1/15:

Bank of America

8:30 PPI

8:30 Empire State Manufacturing

2:00 Fed Beige Book

Thurs 1/16:

American Express, Citigroup, Goldman Sachs, Intel

8:30 Weekly Jobless Claims

8:30 CPI

10:00 Philadelphia Fed

Fri 1/17:

GE, Morgan Stanley

8:30 Housing Starts

9:15 Industrial Production

9:55 Consumer Sentiment

10:00 Job Openings and Labor Turnover Survey (JOLTS)

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Week Ahead: Strong Jobs Report leaves Fed in a Pickle

The stronger than expected jobs report leaves the Fed in a pickle. The economy added 203,000 jobs in November and the unemployment rate decreased to a five-year low of 7 percent from 7.3 percent. You may recall that soon-to-be-departed Fed Chairman Ben Bernanke said that when the data indicated that the economy in general – and the labor specifically – was showing progress, the Fed would take its pedal off the gas and reduce its monthly bond purchases, known as Quantitative Easing or “QE3”. The Fed launched QE3 in September 2012. Since then, the unemployment rate has dropped from 8.1 percent to 7 percent and the economy has added over 2.8 million jobs, or an average of nearly 190,000 per month. That sounds pretty good, except when you consider that it’s only about 10,000 per month more than before the introduction of the program.

Still, there is evidence that the pace of job creation is picking up. Over the past four months, the average monthly gain has been over 200,000 after a late spring/summer slow down. Additionally, the November jobs report showed broad-based gains in a variety of sectors, with manufacturing, construction, education, health and retail all demonstrating improvement. Independent research firm Capital Economics believes that the Fed has “all the evidence it needs to begin tapering its asset purchases at the next FOMC meeting later this month.”

Not so fast, says Jon Hilsenrath in the Wall Street Journal. He notes that the drop in rate was driven by a reversal of some of the shutdown-related increase the month before. “A meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell…because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.”

Indeed, the labor force participation rate (the number of people employed or actively seeking a job) remains at near 36-year lows. Oh, and there are still 10.9 million Americans are out of work, of which more than 4 million have been unemployed for more than six months; total payroll employment (136.8 million) is still short of the January 2008 peak of 138.1 million workers; and while an unemployment rate of 7 percent seems good compared to the recession high of 10 percent, it seems miles away from the 4.7 percent rate seen six years ago in November 2007, the month before the recession officially started.

In other words, if the Fed wants to punt on unwinding QE3 at the December 17-18 policy meeting, it could easily find a way to do so. With unemployment still a good distance above the Fed’s 6.5 percent threshold, it is unlikely to raise short-term interest rates until next year.

Volcker Rule: On Tuesday, regulators are expected to approve the "Volcker Rule," named after former Fed Chairman Paul Volcker. The rule is one of the most controversial parts of the 2010 Dodd-Frank financial overhaul because it seeks to stop banks with federally insured deposits from making trades and putting their own capital at risk, in pursuit of speculative trading profits. But as noted in the Financial Times, “after three years of lobbying, wrangling and debating over the rule, there is the potential for a depressingly messy execution…The desire for a rule specific enough to turn grey into black and white risks turning Volcker into a 1,000-page horror.”

MARKETS: Good news was finally good news on Friday, which saved stock investors from steeper losses. Still, it was the first losing weekly decline in nine weeks for the Dow and S&P 500. According to John Linehan, Head of U.S. Equity at T. Rowe Price, this bull market has lasted for 57 months so far, which is the average length of bull markets since 1930.

• DJIA: 16,020, down 0.4% on week, up 22.2% on year
• S&P 500: 1805, down 0.04% on week, up 26.5% on year
• NASDAQ: 4,062, up 0.06% on week, up 34.5% on year
• 10-Year Treasury yield: 2.88% (from 2.75% a week ago)
• Jan Crude Oil: $97.65, up 5.3% on week
• Feb Gold: $1229, down 1.6% on week (5-month low)
• AAA Nat'l average price for gallon of regular Gas: $3.26

THE WEEK AHEAD:

Mon 12/9:

Tues 12/10:

7:30 NFIB Small Bus Confidence

10:00 Job Openings and Labor Turnover (JOLTS)

10:00 Wholesale Trade

Volcker Rule vote

Weds 12/11:

Thurs 12/12:

8:30 Jobless Claims

8:30 Nov Retail Sales

10:00 Business Inventories

Fri 12/13

8:30 PPI

Week ahead: Jobs report and the Fed's nice mess

“Well, here's another nice mess you've gotten me into!” – Oliver Hardy For a couple of weeks, it was looking like the Fed’s plan to reduce the stimulus it was pumping into the economy (QE3 or the $85 billion of monthly bond purchases) was a done deal. The recent data looked good: second quarter growth was revised higher to a 2.5 percent annualized rate; the monthly average of weekly jobless claims fell to the lowest level since the recession began at the end of 2007; the Institute for Supply Management's manufacturing and service sector indexes improved during the summer; and car sales were strong.

Then the Labor Department released the August jobs report. At first glance it didn’t seem so bad: 169,000 non-farm jobs added, just a bit shy of the 180,000 expected; and the unemployment rate ticked down to 7.3 percent from 7.4 percent, a level last seen at the end of 2008.

But peeling back the onion, things didn’t look too good. The previous two months were revised lower by 74,000, bringing the 2013 average monthly job creation down to 180,000 jobs a month, only slightly ahead of the 175,000 monthly pace seen over the past two years. And then there’s the rate, which dropped for the worst of all reasons: more than 300,000 people left the labor force.

The participation rate, which is the percentage of working age population that is active (employed or seeking employment) in the labor force, fell to a 35-year low of 63.2 percent. To put that number in perspective, the participation rate was 66 – 67 percent over the last 20 years, although some part of the recent decline is due to demographics (i.e. baby boomers retiring). According to Bill McBride of Calculated Risk, “if the participation rate had held steady, the unemployment rate would have increased to 7.5 percent instead of declining to 7.3 percent.”

After parsing the jobs report, the Fed’s decision to taper may not look like a lay up. At the June FOMC press conference, Bernanke said that the Fed would “moderate the monthly pace of purchases later this year” if the data were to be consistent with the Fed’s prediction of slow economic progress. With the August report and revisions to the past two months, there is a case to be made that the improvement is too slow to warrant any change to current policy. After all, the six-month average of job creation is 160,000, which is not much higher than where it stood a year ago, when the Fed believed it was necessary to launch QE3.

But the aforementioned other data points, along with the fact that total non-farm employment has increased by 2.2 million from a year ago and the rate has dropped from 8.1 percent in August 2012 to 7.3 percent currently, might be enough to convince Fed officials that the time has come to at least begin the process of unwinding their aggressive monetary policy. Even after the tepid jobs report, most analysts believe the central bank will announce that it will reduce monthly bond purchases by $10 to $15 billion at the September meeting.

MARKETS: The Dow snapped a four-week losing streak, but it certainly didn’t feel that good. Still, U.S. stocks remain solidly higher on the year...if only we could stop trading now!

• DJIA: 14,922 up 0.7% on week, up 13.9% on year
• S&P 500: 1655, up 1.4% on week, up 16% on year
• NASDAQ: 3660, up 1.9% on week, up 21.2% on year
• 10-Year Treasury yield: 2.94% (from 2.75% a week ago, broke above 3% on Friday; first time since July 2011)
• Oct Crude Oil: $110.53, up 2.7% on week (a 28-month high)
• Dec Gold: $1386.50, down 0.7% on week
• AAA Nat'l average price for gallon of regular Gas: $3.58

THE WEEK AHEAD: Congress is back in session this week and while the focus is likely to be Syria, expect to start hearing about the debt ceiling. The government is on course to reach its $16.7 trillion borrowing limit in mid-October. On the economic calendar, the highlight will be retail sales, which are expected to show a month over month increase of 0.5 percent. If so, the report would provide further confirmation that the economy is gaining steam headed into the final four months of the year.

Mon 9/9:

Congress returns

3:00 Consumer Credit

Tues 9/10:

7:30 NFIB small-business optimism index

1:00 Apple unveils the iPhone5S

Weds 9/11:

10:00 Wholesale Trade

Thurs 9/12:

8:30 Weekly Jobless Claims

8:30 Import/Export Prices

2:00 Federal Budget

Fri 9/13:

8:30 Retail Sales

8:30 Producer Price Index