March 29, 2010
WILL GOOD FRIDAY BE GOOD TO THE LABOR MARKET?
Is the labor market finally set to create jobs on a sustained basis? If not, will the stock market continue to shrug off the delayed rebound in the labor market? Such questions promise (threaten?) to be topical this week as Friday’s update on payrolls for March draws near. Whatever the answers, there's a bit of timing glitch.The stock market will be closed for Good Friday and so equity traders will have to wait till the following Monday to react to the news.
Meantime, the consensus forecast calls for a 190,000 rise in nonfarm payrolls for March, according to Briefing.com. Briefing’s internal forecast is far lower but still positive: +75,000.
A gain of any degree is sorely needed at this point. February payrolls dipped modestly by 36,000, the Labor Department reported. As we noted earlier this month, winter storms were reportedly the culprit for keeping a lid on labor market gains. As for March's weather in the U.S., it's been wet, but blaming the weather won’t wash this time around.
Other than last November’s slight gain, the nation’s nonfarm payrolls have shrunk in every month since January 2008. To fully grasp the depth of the fallout in the labor market in terms of how it compares with previous recessions, consider the chart below, which comes from analysis published by the Minneapolis Federal Reserve. The red line at the bottom of the chart is the percentage change in employment since the recession began in December 2007. Relative to every previous recession since 1948, the current hole in lost jobs is unusually deep. In addition, the trend in job destruction this time suggests that repairing the damage will take longer compared with the past 60 years of economic recovery.
The decline in employment over the past 24 months is obviously way out of line with fall and rebound trends in the post-war history in the U.S. "It has generally taken a little over a year for employment to bottom out," writes UCLA economist Edward Leamer in last year's Macroeconomic Patterns and Stories: A Guide for MBAs, which relies on data published just prior to the Great Recession. But the momentum in job loss is now more than two years old, suggesting that economics textbooks on such matters need to be rewritten. The same might be said for investor expectations.
On the bright side, there’s quite a bit of hope among economists that the long road to recovery in the labor market is finally poised to begin. The recent rise in corporate profits is one reason. Friday's news that corporate profits rose by 8% in last year's fourth quarter--and delivering the biggest year-over-year gain in 25 years--inspires thinking positively in terms of jobs.
"Profits are a leading indicator of the economy and suggest continued growth and likely job gains in the second quarter of this year," opines John Silvia, chief economist at Wells Fargo Securities. Meantime, Jonathan Basile, an economist with Credit Suisse, says: "The fact that you see a sustained recovery in profits over the last four quarters, that's a vote of confidence that the next phase of the recovery could be upon us. And that phase is when companies begin to spend those profits, with more investment and more hiring."
Another reason for optimism comes in this morning’s update on consumer spending, which rose 0.3% last month—the fifth straight month of gain, according to the Bureau of Economic Analysis. "Spending is a function of the labor market, and we believe the labor market is improving right now," Dean Maki, chief U.S. economist at Barclay’s Capital, told Bloomberg News before the report. "That improvement in income growth will provide some support to consumer spending going forward."
After the income and spending report was published, Chris Low, chief economist at FTN Financial, advised via Reuters: "I guess the big takeaway is that consumers are comfortably consuming again. We have positive numbers five months in a row since October, which I guess is a good sign."
But there's also a warning sign in today's personal income and spending report: incomes were flat. Looking at the spending and income trends from last July, to take a month at random, shows that personal consumption expenditures have risen twice as fast as disposable personal income: 2.8% vs. 1.4% (annualized seasonally adjusted data).
How long can spending outrun income? The answer depends partly on when the labor market begins posting gains on a sustained basis. The next clue arrives at the end of the week with the government's payroll update. Stay tuned…
Posted by jp at March 29, 2010 9:50 AM