Employment report

Eat Your Wheaties: A Busy Week for the US Economy

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After last week’s deluge of earnings and end of the week jitters over Ukraine, the focus returns to the economy. The preliminary reading of first quarter growth is likely to show that the severe winter weather slowed down economic progress. GDP likely increased at a pokey, annualized pace of 1.1 percent, a significant downshift from the fourth quarter reading of 2.6 percent. During 2013 (that is, measured from the fourth quarter of 2012 to the fourth quarter of 2013), real GDP increased 2.6 percent, after increasing 2 percent during 2012. All is not lost! Economists are forecasting a much stronger pace in the second quarter and beyond, with growth expected to increase by 3 percent by the end of the year, boosted by an increase in consumer and corporate spending and the fading effect of the government’s reduction in spending.

On the consumer side, the big bump in retail sales in March along with an increase in the numbers of hours worked should allow consumer wallets to open. Meanwhile, orders for core capital goods, which are seen as a proxy for business spending plans, increased by a larger than expected 2.2 percent in March after falling 1.1 percent the prior month. Finally, while government spending is not expected to ratchet up, it should no longer be a drag on growth. The government sector contribution to GDP decreased 1.5 percent during 2013, compared with a decrease of 0.2 percent during 2012.

One caveat to the rosy outlook on growth is housing: reports on Existing and New Homes sales, along with the drop in mortgage lending, has temporarily put the housing recovery on ice. Many housing economists believe that with the weather returning to normal and mortgage rates settling at 4.5 percent, the housing recovery should regain its footing.

Given comments by Fed Chief Janet Yellen since the last Fed meeting, it is also likely that the central bank will err on the side of providing too much rather than too little monetary accommodation, which should also boost growth in the near term. Mid week, the Federal Reserve will conduct a two-day policy meeting, where it is likely to announce another $10 billion reduction in its monthly bond buying program to $45 billion and will keep short term interest rates at zero to a quarter of a percent.

While the economy is not yet operating at full potential, there is evidence that employment may be picking up some steam. The average of new jobless claims over the past month dropped to the lowest level since October 2007 in early April and despite the latest small rebound in claims, the trend indicates that businesses are firing fewer workers than at any time since the recession began. Additionally, in recent months, temporary employment, which has a history of leading to larger rises in the number of permanent hires, has increased. Analysts believe that the US economy created 220,000 jobs in April and that the unemployment rate should tick down to 6.6 percent.

As noted last week (“Are These Green Shoots for Real?”), there is anticipation that wage growth will continue to accelerate throughout the year. One reason that economists believe that your raise is coming is that companies can’t seem to squeeze more productivity out of workers. According to Capital Economics, “Over the past decade, productivity growth has averaged only 1.6 percent, down from 3.1 percent in the decade before that.”

MARKETS: I was going to title this post “Ukraine Strain Inflicts Market Pain” because things were looking up last week, until geopolitical jitters washed over stock investors on Friday. While the situation in Ukraine has not completely derailed market progress (the broad S&P 500 is still up on the year), I reserve the right to use the title in the future.

  • DJIA: 16,361, down 0.3% on week, down 1.3% YTD
  • S&P 500: 1863, down 0.1% on week, up 0.8% YTD
  • NASDAQ: 4075, down 0.5% on week, down 2.4% YTD
  • 10-Year Treasury yield: 2.66% (from 2.72% a week ago)
  • June Crude Oil: $100.60, down 2.7% on week
  • June Gold: $1300.80, up 0.6% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.70 (from $3.51 a year ago)

THE WEEK AHEAD:

Mon 4/28:

Corning, Herbalife

10:00 Pending Home Sales

Tues 4/29:

Twitter, eBay, Marriott, Bristol-Myers Squibb, Merck

9:00 Case Schiller Home Price Index

10:00 Consumer Confidence

FOMC Begins

Weds 4/30:

Time Warner, MetLife

8:15 ADP Private Payroll report

8:30 Q1 GDP – First estimate

9:45 Chicago PMI

2:00 FOMC Announcement

 Thurs 5/1:

ConocoPhillips, Kellogg, Kraft Foods, ExxonMobil, MasterCard, Viacom, LinkedIn

Motor Vehicle Sales

7:30 Challenger Job Cut Report

8:30 Weekly Jobless Claims

8:30 Personal Income and Spending

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

Fri 5/2:

Chervron, CVS Caremark

8:30 April Jobs Report

10:00 Factory Orders

Sat 5/3: The 140th Kentucky Derby, in Louisville, KY

Week Ahead: Strong Jobs Report leaves Fed in a Pickle

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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: 2 Important Days for the Economy Remain in 2013

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Good news: you only have to pay attention to the economy, and by extension, the markets for two days this month! The first one comes this week, on Friday December 6th, when the November employment report will be released and the second occurs 10 days later on Wednesday December 18th, when the Federal Reserve concludes it’s final policy meeting of the year. That’s it – really! Sure there will be other stuff in between, like car and retail sales, some manufacturing and housing data, but let’s be honest: there’s a limited amount of attention anyone can direct to the economy and markets during the holiday season, so let’s focus on the important issues at hand.

For the November jobs report, investors are hoping to build on the better than expected October numbers, when the economy added 204,000 non-farm positions. The results, along with the positive revisions to the previous two months, brought the three-month average of job creation to a respectable 202,000. The consensus for November job creation is 185,000 and the unemployment rate is expected to edge down to 7.2 percent.

If job creation is stronger than expected, then the pressure will be on for the second (and last!) important date of the month, December 18th. On that day, the Federal Reserve will conclude it’s two-day policy meeting, distribute its economic projections and Ben Bernanke will preside over his last press conference as Chairman of the central bank. If the employment situation improves dramatically, it might prompt the Fed to reduce its monthly bond purchases.

But if the jobs report is disappointing, there is unlikely to be any change in policy and you can basically tune out for the rest of the month, with one caveat: Congress is due to return by December 9, and if the debate over the nation’s budget and debt gets contentious, all best are off!

MARKETS: It has been an amazing year for stocks and according to economist at JP Morgan, history suggests an 80 percent chance for a higher market in December.

  • DJIA: 16,086, up 0.1% on week, up 3.5% on month, up 22.8% on year (12 closing records during the month)
  • S&P 500: 1805, up 0.1% on week, up 2.8% on month, up 26.6% on year (8th straight week of gains, the longest stretch of weekly advances in a decade)
  • NASDAQ: 4,056, up 1.7% on week, up 3.6% on month, up 34.5% on year
  • 10-Year Treasury yield: 2.75% (from 2.75% a week ago)
  • Jan Crude Oil: $92.72, down 1.3% on week
  • Feb Gold: $1250.40, down 2.9% on week, down 5.5% on month, the worst November since 1978
  • AAA Nat'l average price for gallon of regular Gas: $3.27

THE WEEK AHEAD:

Mon 12/2:

Cyber Monday - last year, sales totaled $1.46B

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 12/3:

Motor Vehicle Sales

Weds 12/4:

8:15 ADP Private Sector Jobs

8:30 International Trade

10:00 New Home Sales

10:00 ISM Non-Manufacturing

2:00 Fed Beige Book

Thurs 12/5:

7:30 Challenger Job Cuts

8:30 Jobless Claims

8:30 Q3 GDP – 2nd estimate (1st estimate=2.8%)

10:00 Factory Orders

Fri 12/6

8:30 November Jobs Report

9:55 Consumer Sentiment

3:00 Consumer Credit