Market Commentary

On balance I believe January’s employment data
February 08, 2010

On balance I believe January’s employment data was stronger than expected strongly suggesting the economy is on the verge of creating nonfarm jobs.  As widely noted January’s nonfarm payrolls declined by 20,000 versus the consensus view of a 15,000 gain.  On the other hand, the household survey or unemployment rate declined to 9.7% from December’s 10% rate, the result of 541,000 jobs added to the workforce.  Analysts expected the unemployment rate to remain unchanged.

The difference between the two surveys is as follows….The household survey or the employment rate is derived by calling about 60,000 households asking whether or not they are working.  This includes farm workers, self employed, private household workers. The household survey can only count one individual as having one job even though if they hold two jobs.  Via this survey 541,000 jobs were created in January.

The nonfarm payrolls or establishment survey is calling 375,000 businesses encompassing about 50 million employees and asking whether or not they are hiring or firing and the net changes.  This survey can double count workers as a worker can be on two different companies payrolls.  This is more comprehensive as it gives hours worked, wages, etc.

Historically the two surveys track each other but wide divergences began with the proliferation of consultants and outsourcing in the late 1990s and early 2000s.

Regarding the household or employment rate can we draw the conclusion that small business creation is starting?  Is the American “can do” entrepreneur spirit rising?

As noted above, the household survey rose by 541,000, an increase that brought the unemployment rate down to 9.7% which subsequently increased the labor participation rate to 64.7% from December’s 64.6% level.

Regarding the establishment or nonfarm payroll survey, I believe a major reason why jobs declined by 20,000 instead of rising by the expected 15,000 were that state and local governments eliminated 41,000 workers.  The federal government added 33,000 for a net loss of 8,000 jobs.

Why do I think nonfarm payrolls will soon rise?

1.  The number of part time workers fell to 8.3 million from last month’s 9.2 million. 

2.  The number of temporary workers rose by 52,000, the sixth consecutive increase. 

3. The number of factory workers rose for the first time since April 2006.

4.  Against the above background the average work week rose more than expected.

Historically similar data to that as above precedes hiring.

Many are suggesting this recovery will be jobless, similar to the 1991 and 2002 recoveries where job creation did not begin until two years after the rebound commenced.  Were these experiences anomalies as typically nonfarm payrolls rise within two or three months following the end of every other post War recessions?

I ask what are the odds the pace of hiring might exceed expectations.  As noted many times I believe most companies panicked and fired too many people last fall/winter (5.3 million people from October 2008-July 2009) to ensure survivability.

I place the odds about 50%.

Turning briefly to the market, equities were earlier crushed on sovereign European debt concerns, fearing a possible dissolution of this economic union.  What would be the impact if this does occur?

Markets however staged a late day rally on speculation that the European Union (EU) may come up with solution over the weekend to help Greece. 

Last night the foreign markets were mixed.  London was up 0.27%, Paris up 0.60% and Frankfurt up 0.59%.  Japan was down 1.05% and Hang Sang down 0.58%.

The Dow should open nominally higher. The 10-year is off 1/32 to yield 3.57%