Daily Insight

Markets searched for direction in the early going, but stocks ultimately finished with solid gains.

A relatively pleasing weekly jobless claims report showed a larger-than-expected decline in initial jobless claims to 440,000 and a continuing claims tally of 4.54 million – a one-year low. Additionally, markets cheered consumer price data and a lending report out of China that lacked evidence of inflation, suggesting China can lay off tightening measures for the time being. (Of course, China raised the bank reserve requirement this morning in an attempt to slow credit expansion, so apparently yesterday’s excitement was unwarranted.)

Meanwhile, leaders from the European Union announced that financial assistance will be made available to Greece, but no specific details were provided. Markets continue to wonder how much money will be involved and whether aid will extend to other countries currently facing fiscal challenges. It does appear, however, that investors are growing more optimistic on the situation and are more confident that Greece’s credit crisis won’t have spillover effects in the U.S.

The materials sector and the energy sector led the way with gains of 1.58% and 1.57%, respectively. More impressive was that they outperformed the broader market for the entire session, even in the face of a firmer dollar during the early going. Financials lagged as a report from the Financial Times said leading economies are close to agreeing on a global bank tax.

Market Activity for February 11, 2010
Job picture improves slowly, but surely

Weekly initial jobless claims declined 43k to 440k, versus last week’s figure which was revised upward by 3k to 483k. The four-week moving average, which provides a smoother trend in claims, dipped by 1k to 468.5k, while continuing claims dropped to 79k to 4.54 million.

A Labor Department official said the results reflect the end of an “administrative backlog” that built up when state government offices were closed during the year-end holidays. Next week’s claims data will probably be affected this week by the snow storms on the east coast.

Today’s Wall Street Journal has a nice article today (Page A4) that examines a concern mentioned before in this letter, which is that many of the jobs eliminated by the recession are gone forever. Economic growth will eventually return as will job creation, but the types of work will be in different industries.

Using the example from the Wall Street Journal, an economy growing at 3% will add roughly 133k jobs a month. The problem is that about 100k jobs a month are needed just to soak up new entrants to the work force, which means the pace of job creation economists are anticipating will only slowly reduce the high unemployment rate.

On the bright side, we are seeing the classic cycle unfold where layoff announcements ease first, which is then followed by a surge in temporary hiring and eventually leads to more permanent hiring. It’s just that this time the era between job losses and meaningful job gains is likely to be longer than normal.

Coming out of past recessions, the expansion of debt-financed consumption on housing, autos, and other durables has been the strongest engine of job growth – clearly there are massive impediments to this scenario occurring this time around.

On tap today

Advanced retail sales were initially scheduled to be released yesterday, but were delayed until today due to the weather in Washington. We will see further evidence that consumer spending has returned, albeit at a much lower level than before the crisis as the focus remains on deleveraging.

Other releases today include the preliminary January reading of the University of Michigan Sentiment Index, expected to rise to 75.0 from 74.4, while business inventories are forecasted to rise 0.2% in December after posting a 0.4% increase in November.

Have a great weekend!


Peter Lazaroff, Investment Analyst

Daily Insight

U.S. stocks closed lower on Wednesday after the latest mortgage applications report showed purchases fell 7% last week and a Bloomberg measure on global investor confidence pointed to a growing unease over government finances – nothing new there but it reinforced the concern.

Basic material, utility and energy shares led the broad market’s decline – so much for that commodity-related rally extending to a second session; I’m obviously referring to material and energy sectors, which led the market higher on Tuesday. Financials were the only of the 10 major sectors that closed higher for the day.

Volume remained weaker than weak with just 960 million shares traded on the NYSE Composite. Through hump day volume has averaged just 1.06 billion shares per day, 10% below even the low average of the past six months.

Market Activity for February 10, 2010
The Great Unwind; It’s Going to Be Slow and Extremely Telegraphed

Bernanke laid out the elements of his exit strategy in a text release yesterday and nothing was unexpected. They will continue to let some of the temporary lending programs expire -- the exit from these programs is substantially complete. They will also increase the discount rate, thus modestly widening the spread between the rate banks can borrow from the Fed (discount rate) and the rate banks borrow from one another overnight (fed funds). That spread was narrowed during the crisis.

The bond purchase program (quantitative easing) will end on March 31. Although, where the Fed leaves off Fannie and Freddie picks up as it has been reported the GSEs will increase purchases of delinquent loans beginning in March; expecting to purchase a significant portion of the seriously delinquent population within a few months, but I digress.

The Fed will also engage in reverse repos, which means they’ll sell Treasury and agency-debt securities to primary dealers thus taking money out of the system.

Bernanke & Co. will also engage in more unconventional measures, such as adjusting higher the interest paid to banks that keep excess reserves at the Fed and set up term deposits that hold these funds from the system for a specified period of time. This, they hope, will incentivize banks to keep more reserves in these accounts rather than lend them out – lending them out would expand the money multiplier thus boost inflationary ramifications. (This will be quite interesting to watch in the highly charged political environment. Politicians are trying to get banks to lend more and Congress will make it tough on Bernanke to engage in this policy, even if it is well in the future. The Fed is supposed to be independent of Congress, but we’ll see how that goes.

Since the Fed’s been at zero for so long it means a massive excess of reserves are in place (makes cash very easy to procure), swamping the demand for those reserves – basically, it makes it very tough to manage the fed funds rate and I think this is where the term deposit strategy comes in, it immobilizes this money.

They also stated, if necessary, they can begin selling their holdings of Treasury and mortgage-backed securities to truly reduce the Fed’s balance sheet. That would jolt interest rates higher and it’s highly highly unlikely that they would do so.

Bernanke made a point of explaining that none of the most effective paths to unwind policy (drain liquidity) will take place for some time. He emphasized this point by throwing in the “exceptionally low” and “extended period” phrases with regard to fed funds.

Mortgage Applications

The Mortgage Bankers Association reported their applications index fell 1.2% for the week ended February 5, following the 21% bounce in the week prior. The index was dragged down by a 7% decline in purchases; refinancing activity rose 1.4%.

The rate on the 30-year mortgage fell below 5% for the first time since the week of December 18, averaging 4.94% last week. The decline in purchases even as the fixed rate on 30-year money is so cheap, along with other government incentives, shows the troubled nature of housing. It will ultimately take a significant improvement in the labor market to spark a durable rebound in the housing market.


Trade Figures

The U.S. trade deficit widened substantially more than expected in December, largely due to higher crude imports and the price we paid for those supplies. You know, as longer-term readers are familiar, I think it is quite ironic that many of the people who complain about the perils of our deficit in trade (importing more goods than we export) are many of the same people who work (or at least have no problem) to restrict domestic energy production. Our energy policy is a major reason for the degree of our deficit in trade, you take out energy and the trade deficit is just 40% of what it is in total including crude oil. I’m not saying we should attempt to produce all of our energy needs, we get 35% of our energy imports from Canada and Mexico. Partnering with our North American neighbors makes sense, particularly since many of their supplies are sources that are cheaply produced. But it makes no sense to restrict our own capabilities. It makes zero sense economically and is dangerous from a national security perspective.

Anyway, to the numbers. The trade deficit widened by 10.4% to $40.18 billion in December from $36.58 billion in November – economists had expected the figure to narrow to $35.8 billion. Exports rose 3.3% as imports increased 4.8%.

I’m not one to worry about deficits in trade, outside of the energy story, as higher imports do suggests at least some increase in domestic consumption is occurring – besides as long as we engage in the right economic and fiscal policy those dollars come back home in the form of investment. By way of how the numbers came in it suggests U.S. corporations spent some of the mounds of cash they currently sit on, which is needed to make up for the lack of consumer outlays. This is a function of the inventory rebuilding, even if it is scant compared to the normal expansion.

The increase in imports was boosted by not only a 16.9% month-over-month increase in crude oil but capital goods also looked good, up 4.7%. Telecom equipment, computer accessories the pushed the ex-aircraft capital goods reading higher. Consumer goods were unchanged.

Exports were also boosted by the capital goods component (up 5.2%), namely the 44% jump in civilian aircraft – that’s good to see. Industrial supply exports rose 6.1%, thanks to a 10.3% increase in exported automotive products. There is this sense of frustration among a certain segment of the U.S. population due to our appetite for foreign-owned (not produced, but owned) vehicles. But the rest of the world, specifically China, does buy a lot of cars from us and that shouldn’t go unnoticed.

The Greek Bailout

The European Union (EU) is expected to hold official discussions, the vaunted “summit,” today as they decide how to extend help to the Greek government to avoid a funding problem. A bailout raises the concern that the EU will cave to member countries that are the worst violators of budget deficit constraints. Will these countries pull down the Union over time? The EU was always walking a fine line, attempting to manage a one policy monetary system with various political budget policies. If they don’t get a handle on things it does raise the question: How long can the euro survive? This may sound like a ridiculous suggestion right now; it may not be so outrageous a couple of years out.

But the fact that they are going ahead with a bailout, which should have been expected all along, shows that they view a member defaulting on payment as a larger risk – even a small member such as Greece. But bailouts are only a short-term fix; the snowball continues to roll and get bigger.

The EU needs to understand that only growth and reduced spending will ultimately ease concerns over budget problems. That means a complete restructuring of their entitlement programs and tax structures. I’m not sure the EU citizenry has it in them to accomplish such action, they’ve been living the very comfortable life of European-style socialism for too long perhaps – but this system isn’t viable in the long-term, that’s the problem. The U.S. better heed the lessons coming from Europe right now, and fast, or we’ll have the same debt-funding troubles hit our shores.

Have a great day!


Brent Vondera, Senior Analyst

The Fed's Exit Plan

Today, Fed Chairman Ben Bernanke released the central bank’s exit strategy. His statement didn’t shed much light on the timing of the exit, but it provided some more specific details on policy tools. It is clear, though, that meaningful tightening won’t be happening anytime soon as the Fed Chairman explained the economy still needs “highly accommodative policy.”

The Fed will “before long” modestly increase the discount rate – the rate at which the Fed charges banks for emergency loans – but explained that this “should not be interpreted as signaling any change” in monetary policy. As expected, Bernanke also discussed paying a higher interest rate on excess bank reserves and reverse purchase agreements as the first tools for tightening credit.

The media seemed to emphasize the Fed’s plan to pay interest on excess reserves, which provides banks with some incentives to not lend all of their capital. In addition, if a bank can earn a reasonable return from the Fed, which poses no credit risk, other banks loans will be priced higher and credit will contract. Until reserve levels are much lower – and they are at unusually high levels – this tool along with targets for reserve quantities may play a bigger role in the Fed’s exit strategy than the fed funds rate.

Bernanke also explained that the Fed could sell securities to drain reserves from the banking system, but he did not anticipate doing so in the near term. The Fed is allowing agencies and MBS to run off and would sell them only if “the economy is clearly in a sustainable recovery;” however, the Fed is still rolling over Treasuries into new securities.

The obvious risk to the Fed’s exit plan is the error in execution. The amount of credit expansion that could be caused by the enormous stockpile of reserves at the Fed is largely unknown, as is the rate at which banks will be content keeping these reserves with the Fed. The timing of the exit is also a very delicate balance that we can’t expect will be perfect.

Any progress towards an exit, however, should be viewed as a positive at this juncture since the “emergency” rates in place are simply unnecessary.

--

Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks began Tuesday’s session considerably higher on the heels of strong pre-market trading and gained momentum mid-morning on word that Greece will get European Union help with its budget. (It was always a fantasy that the EU would escape bailing out Greece, and unless things go very well they’ll be bailing other countries too as the Greek situation is the canary in the coal mine.)

Bailouts hardly suggest the damage will be mitigated outside of the short term, you pay for reckless behavior now or you pay a higher price later; the markets seem to like the later option, and it showed. The broad market did pare morning-session gains late in the day but closed nicely higher nonetheless.

If traders didn’t want to take a position in front of the Bernanke’s testimony on Monday, they sure didn’t have a problem with doing so yesterday. I think more people started to realize that Bernanke isn’t going to go and surprise the market right now – we’ll get more of the same: their exit strategy plan will involve reverse repos and interest payments on excess reserves as the primary ways the Fed will attempt to drain liquidity. I think he’ll make it very clear that this liquidity drain isn’t going to occur anytime soon. Mr. Bernanke was scheduled to testify today on the FOMC’s exit strategy, but due to the weather in Washington the Fed will only release the text version -- Big Ben is thanking the global cooling cycle, or is it just the seasonal change? I can’t keep track these days.

Shares of Caterpillar helped propel the Dow Industrials after Morgan Stanley upgraded the shares along with a few other industrials. CAT shares jumped 6% yesterday, following a 20% slide over the past month – the shares have been a spectacular performer since the March lows, jumping twice that of the broad market.

Basic material shares were the leading performing sector; the group has taken it on the chin over the last four weeks, down 14% until yesterday’s 2.5% pick up. Energy and industrials also outperformed the market. Health care and utility shares were the laggards but managed gains of 0.63% and 0.96% respectively.

Ex-financial profit results continue to hang in there, up 13% with 65% of S&P 500 companies in to this point. Revenues are up 3.8% -- 54% of companies have beat their revenues estimates, 39% have missed and 7% have matched.

Market Activity for February 9, 2010
NFIB Small Business Optimism Survey

The National Federation of Independent Business reported that their optimism survey rose to the highest level in 16 months for January. Seven of the 10 components of the survey rose last month, led by an increase in expectations for higher sales and a reduction in the number of companies planning to cut stockpiles. More businesses also planned to increase spending on new equipment.

The index rose to 89.3 in January from 88.0 the month prior. The cycle low of 81.0 was touched last April; the all-time low of 80.1 was hit in April 1980; the average reading since the NFIB began tracking small business trends in 1974 is 98.9.

As the chart above illustrates, the overall survey remains depressed, stuck below a reading of 90 for the longest stretch in the history of the survey.

The plans to increase new equipment spending reading, while the highest since November 2008, remains significantly below the low points of the previous two recessions (currently 20 vs. 25 in those prior downturns – the all-time low of 16 was hit in November 2009).

The hiring aspects of the report remain very weak – this along with the plans to increase equipment purchases are the two most important areas of the report to watch. The NFIB’s chief economist noted that there was no improvement in the job creation statistics for January. Just 9% of owners increased employment by an average of 3.0 workers per firm, but 19% reduced employment by 3.9 workers per firm.

Over the next three months plans to create jobs improved, but still more firms plan to cut than add. That’s not a particularly good sign, but since the plans to reduce fell more than the plans to increase jobs, the reading did improve.

The overall index was restrained by declines in the net number of firms saying it was a good time to expand and the reading anticipating better business conditions. The sales expectations reading, as mentioned above, improved but actual reported sales over the previous three months fell to -26 from -25 in December. We’re going to have to see actual sales improve for several months before small firms go on a hiring spree that would bring the unemployment rate meaningfully lower. The NFIB survey stated: “Owners complained that ‘poor sales’ was their top problem, and there is no need to hire with no new customers. It is hard for workers to ‘earn their pay’ in this environment, a necessity if a firm is to stay in business.” Wow, that’s a hard-hitting statement.

The survey went on to state: “Twenty-four months of recession have sapped the financial strength of many small firms that are too numerous now in the new spending/credit environment. Too many houses were built, too many strip malls opened, too many restaurants started, too many retail outlets were launched in the 2003-2007 period and all of them cannot be supported by a consumer that now chooses to save.”

These are very sobering comments. I think the official recession is not going to show it lasted two full years – and later commentary within the NFIB report did acknowledge the recession will likely be officially announced to have ended in the second half of 2009. It’s clear though that small firms still feel recession is upon us.

The inventory reading improved substantially, up 7 points to a -21 from December’s record liquidation reading.

The survey was based in 2,114 survey responses through January 31.

Wholesale Inventories

Distributors’ inventories fell in December even as sales rose for an eighth-straight month, coming off of the worst collapse in the postwar era as sales plunged 24% over an eight-month stretch.

So inventories fell 0.8% in December after a huge 1.6% November rise – the biggest since June 2004. This may have suggested distributors had trouble keeping up with demand after November’s big 3.6% jump in sales. Or maybe it’s because firms aren’t willing in this uncertain environment to add to stockpiles even as they are near record lows. The inventory-to-sales ratio came in at 1.12 months’ worth, the all-time low is 1.11.

We’ll need the following months to confirm whether or not firms are willing to stretch just a little bit and take on inventories that are meaningfully higher than the record low. In any event, very low stockpiles will continue to catalyze GDP growth for another quarter or two. Beyond that, we’ll need durable sales growth or it all just fizzles out.

Today’s Data

Today will be very light in terms of data releases as all we’ll get is mortgage applications and the December trade figures. The budget statement (federal budget deficit figure) was scheduled for release but has been postponed due to the weather. The January retail sales figure, which was scheduled to be release tomorrow, will also be postponed; the results are now planned to be announced on Friday.

I’ll be out of the office until Tuesday, either Dave or Pete will take over until then.

Have a great day!

Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks fell for the third day in four as it didn’t appear traders found reason to get in front of Bernanke’s testimony to Congress on Wednesday. The Fed Chairman will lay out the strategy for exiting the unprecedented level of monetary easing that is currently in place. To be sure, there are other concerns affecting the market right here but you never know what may be stated, or more importantly how the markets interpret Bernanke’s statements.

The broad market was actually holding in there pretty well -- up in the morning and hovering around the opening price level into the afternoon session – until sliding a bit in the final hour. For what it is worth, the Dow closed below the 10K mark for the first time since early February – it has crossed this mark 57 times now since 1999.

Some comments from former Fed Chairman Greenspan on Sunday morning’s Meet the Press may have also had an effect on trading. Greenspan stated that the economic recovery will be “slow and trudging.” He also explained that he’d be very concerned if stock prices continue to fall, more on that below.

Commodity prices rebounded a bit. It’s been a pretty good pullback, down 12% over the past month after hitting post-crisis highs. A move of 12% over this length of time isn’t saying a lot as these prices can swing violently, but it’s the most significant move since June and all about sovereign default concerns – European banks hold a lot of the public debt that’s in question and that gets the market concerned about future credit contraction.

Financials led the broad market lower, followed by basic material and industrial shares. All major industry groups closed lower.

Market Activity for February 8, 2010

Central Bankers and the Risk Trade

Central bankers are keeping a close eye on stock prices, as Greenspan signaled this weekend and we’ve talked about several times now. A key objective of the ZIRP (zero interest rate policy, for new readers) was to get traders and investors back into risky assets – they were running from anything other than cash and Treasury securities early in 2009. When you completely erase returns on cash holdings, as the Fed has done, you will get people hunting, desperately in some cases, for yield and returns – that means a rush of money into stocks, and higher-yielding corporate bonds.

Boosting stock prices is really the only quick way with which the Fed could begin to repair household balance sheets; they can’t do it from the perspective of income as that takes job growth, which takes a considerable amount of time. They have certainly accomplished this goal to some degree as household net worth has bounced $5 trillion since last March. The crushing 57% plunge in stock prices (from the Oct. 9, 2007 high to the 13-year low on Mar. 9, 2009) and the roughly 30% decline in home prices (from the July 2006 peak to the cycle low hit in Jan. 2009) stole more than $17 trillion from household net worth. It hit $66 trillion in 2007 and currently sits at $53.4 trillion.

But the perils behind this strategy are not fully being considering in my view, or maybe they have been recently. When your strategy is to push people into riskier assets, traders push aside their consideration of risk as they myopically hone in on the yield – it’s like throwing chum to sharks, a frenzy results. What these yield/return seekers have forgotten, is that there is another side to this trade – prices can move lower. It is utterly amazing to me how so many have forgotten this just 10 months removed from largest collapse in riskier-assets since the 1930s, but that’s what ZIRP does. We’ve recouped a lot by way of stock prices, half of the losses before this 8% pull back. Yet one gets this sense that too many people expected this substantial rally to continue without abatement. We simply face too many headwinds, and it takes time to forge through these challenges.

Anyway, Greenspan made it clear and for sure Bernanke is keeping a close watch on stock prices in particular. If the market endures a decent sized correction here -- which I think is likely as the market begins to consider weaker prospects for growth in the back half of 2010 and into 2011, the cost of very deep deficit spending, the sovereign debt realities that ensue, and a housing market that very likely has to get past another round of downside – we may not yet fully appreciate the extent to which both Congress and the Fed will accelerate easing strategies over the coming months. That means a return to quantitative easing from the Fed and additional spending from Congress, both of which will cause market distortions and new problems that will have to be worked off over the next couple of years.

I do not wish for this to occur, which is why this letter keeps harping on the need for the Fed to gently raise rates and Congress to slash tax rates across the board. Even mild rate hikes will cause problems for this economy, but the slashing of tax rates will offset that pressure – I can’t emphasize this enough. At some point, you’ve got to rein in some of the things we’ve done and force the market to stand on its own. If we don’t, I’m sure additional problems will arise – at which point the Fed won’t have to worry about a short-term correction to this rally from the March lows, but a mired stock market for a longer period of time.

Coming Data

We were without an economic release yesterday but get back to it today with the NFIB Small Business Optimism Index and wholesale inventories (December).

On Wednesday, we receive Mortgage Applications (week ended February 5), the trade balance (December) and the monthly budget statement (size of the budget deficit during January)

On Thursday, and I’ll be out off the office the final two days of the week, we get retail sales (January) and jobless claims.

The retail sales and jobless claims figures will get most of the attention, but NFIB and mortgage apps will be important to watch as well.

Next week things get very interesting with the following releases:
Housing starts, industrial production, Philly Fed and CPI. The market will want to see some bounce back in housing starts after December’s 16% plunge (we’ll see how weather-related that drop was) and industrial production will need to post a good reading (December’s results were all on cold weather as the utility component accounted for the entire increase).

Have a great day!


Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks spent most of the session in negative territory, hitting the day’s nadir shortly after lunch (Dow at 9834 and 1044 on the S&P 500), but turned higher about an hour before the closing bell. The Federal Reserve’s latest report on consumer credit provided the impetus for the market’s turnaround as it showed the smallest drop since the record consecutive months of decline began in February.

There was also talk that the market was helped by speculation the EU would come up with a plan for Greece’s budget this weekend at the G7, this should be interesting. But it seemed to be more on the consumer credit news as the market’s about face occurred directly after that release. Now that the meeting has come and gone, we see it was more talk than anything else, as is usual. The sovereign debt story is not over; there will be a default or two and plenty of close calls. This is the nature of things coming out of such a deep global contraction, government spends like mad to combat the problem and that combines with a slide in tax revenues to widen budget gaps to levels that cause additional problems.

Total consumer credit fell just $1.7 billion in December after a record $21.8 billion decline in November – records go back to 1943. Revolving credit (credit card accounts) continued to decline, extending the record streak to 15 months – this is likely to continue for a while as credit lines run off of delinquency models. What helped the figure was the non-revolving segment, basically car loans. With loan terms averaging 3.26% during the month and maturity at 64 months…and loan-to-value at 92% -- giddy up!

Commodity prices continue to get hit pretty hard. Oil got slammed down to $70/barrel before recovering to $71.19 on Friday, down 8% in three sessions; gold was back to $1,052/oz. before jumping this morning; copper is down 7.5% since Wednesday and 18% from its recent high.

As the flight to safety has returned, the dollar is the beneficiary – up above 80 on the Dollar Index (DXY) for the first time since July as it was coming off of its crisis high of 89 on the DXY. Treasury securities are back in vogue as well. Man, anyone who went short Treasuries thinking it was a no-brainer has gotten crushed thus for in 2010.

Market Activity for February 5, 2010
January Jobs Report

The January jobs report printed numbers that set up an environment for very contentious analysis. Those who believe this recovery is normal in nature viewed the report with an optimistic hue, while those who understand that recoveries following credit/balance sheet-driven recessions are not at all normal viewed the report with skepticism.

For me, and I’m undoubtedly in the latter camp, I don’t look askance at the report, but would rather wait and see the subsequent months confirm what I think is going on – a large divergence between the household and payroll surveys due at least partially to a lot of people who were working in the construction sector now venturing out on their own, adding to the roles of the self-employed. Many of the nearly two million jobs that have been lost in that sector are not coming back, not anytime soon – for all intent and purpose they have been structurally eliminated and those formerly in the sector are beginning to realize this. The household survey picks up these self-employed, the payroll survey does not.

So let’s get to the specifics, and we’ll begin with what is more familiar to most people: the payroll survey. The Labor Department reported that 20,000 payroll positions were cut in January (economists had expected a 15K increase). Whether, 20K up or down, it doesn’t matter because this is a statistically insignificant level. What is statistically relevant is the downward revision to the December reading, which showed 150K jobs were lost; it was initially reported as decline of 85K last month.



In fact, February brings with it annual labor market revisions and those new readings showed that 8.4 million payroll jobs were slashed offer the past two years, it was previously believed that 7.2 million payrolls were lost. BTW, the Bureau of Labor Statistics “birth/death” model estimated that more businesses open than closed in 2009 for a net 1.79 million jobs. I’ve never questioned this B/D model, but it is a little hard to believe that the worst recession in the postwar era saw more businesses open than close, so it’s not out of the question to wonder if well more jobs were lost than even 8.4 million. I’ll leave it at that.

These numbers are obviously backward looking, they are in the past, so one shouldn’t dwell on them. What it does inform us of is that the repair that’s needed within the job market will take even longer to accomplish than previously expected. If a meaningful degree of repair in going to occur within the next two years then we are going to have to see even stronger monthly job growth and GDP figures than it normally takes. Normally, it takes at least 120K in monthly job gains to keep the jobless rates steady and something closer to 200K/month over a period of time to bring it lower. Those number may have to be greater now, possibly 150k/month to keep it from rising and 300K/month to get the jobless rate back down to 8% in 18 months time.

Anyway, back to the monthly numbers. In terms of industry, goods-producing industries shed 60,000 payrolls last month. Manufacturing actually added 11,000 jobs (first time in more than two years and much better than the three-month average of -23K). Construction cut 75,000 jobs (considerably worse than the three-month average of
-47K). I don’t believe one can blame this on the weather as was the valid case in December. It is more a function of the accelerating pace of commercial construction deterioration. But, we’ll see over the next couple of months which view is correct– if it was the weather, construction employment should bounce with vigor in the coming months and vice a versa.

The service-providing industries added 48,000 jobs in January after a downwardly revised -69k in December, which was initially reported as a 4K decline. Business services added 44,000 jobs (in line with the three-month average of +45K). Retail trade added 42,000 jobs (much improved from the -8K on the three-month average). Trade and transport added 15,000 (nice improvement as the three-month average is -18K). The financial sector cut 16,000 jobs (about in line with the -10K monthly average over the past three months).

Temporary positions rose 52,000, probably mostly within the business services sector, and are up 247,000 since September. This is good news as it usually indicates more permanent employment is on the horizon. This is the expectation, but the looming question remains to be seen; Will the gains be strong enough and durable enough to bring the jobless rate lower in a reasonable amount of time? Further, as I’ve suggested on more than one occasion, the reliability of indicators that have proven accurate in the past may not be so true this time. Temp. employment has risen very nicely, but in this environment one has to be cautious of firms’ willingness to turn these workers into permanent employees (and thus take on the benefit expenses that accompany a permanent worker) like has occurred in the past.

The government cut 8,000 jobs. The Federal government added 33K, but states and local cuts offset this increase.

So now we get to the household survey. This is the survey that is used to calculate the unemployment rates. For newer readers, the payroll survey (which calculates the number of payroll jobs gained or lost) is the monthly jobs number you read in the headlines. The household survey is used to calculate the unemployment rate and it captures the self-employed.

The unemployment rate fell to 9.7% from 10% in December. Economists had expected the rate to hit 10.1%.

The household survey showed a gain of 541,000 jobs last month, after the December decline in 589,000. This is a volatile measure (as the prior sentence illustrates) and has bounced all over the map over the past few months. This pick up for January is why the unemployment rate fell to 9.7% from 10% even as 111,000 people came back into the labor force – meaning they had looked for work in the four weeks that this monthly survey captures.

There is no way of knowing just yet whether this bounce in household employment is the beginning of something. I’ll repeat, it will take several months of a trend to be established to confirm whether we’ll muddle around at low levels of jobs growth or something more substantial will take place. I think what occurred via the large pick up in household employment is that enough of those out of work in the construction sector decided to become self-employed – one man shops of carpenter, electricians, etc. Thus, as they stated via the survey that they were out of work in December, they now stated they were working in January. Again, we’ll need some consistency in the readings over the next few months to confirm what is going on.

The U6 unemployment rate, which captures the officially unemployed plus “discouraged” workers (those that didn’t look for a job during the survey period because they believed their chances of finding one was low) and those working part-time because they couldn’t find full-time work, fell for just the second time in two years. U6 came in at 16.5%, meaningfully lower than the 17.3% in December as those who want full time work but are working part-time for economic reasons fell to 8.3 million from 9.2 million in December.

Unfortunately, the long-term jobless rose to a new record as the percentage of those unemployed for at least 27 weeks rose to 41.2% from 39.8% in December. More than four out of 10 unemployed persons out of work for more than 27 weeks.

In addition, the average duration of unemployment extended to a new record of 30.2 weeks from 29.1 weeks in December.

The average hours of production per week ticked up to 33.3 in January from 33.2 after hitting the all-time low of 33.0 in October. This number will have to rise to 33.8-34.0 before any meaningful hiring takes place. The 10-year average is 33.7.

So again, this report is quite conflicting. There were positives, such as the unemployment rate decline even as the participation rate rose, the rise in temporary employment, the continued easing in payroll losses (three-month avg. is just -35K/month, that was -220K/month just three months back) and the tick higher in hours of production.

Yet, we’ll need to see the jump in household employment be confirmed in the coming months, large questions remain as to whether this economic environment can produce the job growth needed to repair a meaningful portion of the 8.5 million payroll jobs lost over the past two years, and the long-term unemployment situation continues to deteriorate.

I think this report leaves more questions than anything and it doesn’t tell us much in terms of new information. Remember that we’ll have 700,000 2010 census workers (a two-month gig) being hired by early summer. This is going to cause distortions and make analyzing the data even more contentious among economists.

Have a great day!

Brent Vondera, Senior Analyst