Friday, March 04, 2011

Employment Report Looking Positive

So, the Bureau of Labor Statistics released its monthly reports of employment and both were positive. As expected, payrolls increased by about 200k in February, along with substantial upward revisions to January and December, indicating that corporate payrolls are expanding.

December 2010 was originally reported at 103k, then revised upward to 121k in the Feb report was revised again to 152k. Jan 2011 was also revised up from a disappointing 36k to 63k, I expect a number closer to 100k come April.

It suggests that the unemployment rate, (from the household survey, a different measure), which continues to decline is not just a statistical quirk, but is indicative of real job market experience.

The unemployment rate, which has dropped from 9.8 percent in November is not only dropping because more people are working, however. It is also due to the fact that the participation rate (the percentage of adults who are part of the labor force) is declining. I expect this trend to continue, as large numbers of Boomers retire and leave the workforce permanently. This phenomenon has implications for economic growth and taxes, many of which are not necessarily positive, but the good news for job seekers is that fewer adults are trying to hold a job, which should mean more opportunity for those who have jobs and are looking for them.

It may mean that the job creation rate necessary for absorbtion is lower than anticipated. It is estimated that the US has to generate between 125k and 150k jobs per month to accomodate new net labor force entrants, which the economy is now doing. However, this number has not changed since the 2000-2002 recession, whereas the net new market entrants may in fact be much lower going forward.

CNBC is suggesting that unemployment will now stay below 10%, and I believe this is correct. Unemployment will likely continue to drift lower, slowly perhaps, but another 0.5% to 1.0% by the end of the year is conceivable, with further improvement in 2012.

What will impede rapid decline will be the large number of discouraged workers who are no part of the labor force returning to the job market as they perceive better employment prospects.

Nevertheless, the numbers were quite encouragining - private sector employment was up over 220k, while state and local government cut employment. Counting the upward revisions in the earlier months, private sector employment expanded by nearly 300k. This will have positive impact for government budgets as well, as taxes increase and costs decline.

The stock market, after an initial positive response, turned around and was down on the news. Though this follows a big surge on Thursday, when rumors of a +250k number were circulating.

The markets may have also woken up two other facts: first, that productivity gains, which have been astonishing (and helpful of corporate profits) are likely going to moderate - after all, new hiring is what happens when the existing labor force cannot meet the demands for output, and second, that it is only a matter of time before the Fed begins to withdraw its exceptional monetary support.

I am hopeful that awareness of these two facts will drive the market lower and provide attractive long term valuations.

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