Another day, another set of data points that underscore the notion that the economy is doing fine. The Labor Department this morning released the March Employment Report and, once again, there were fresh numbers showing the labor market’s death has been widely exaggerated. Does this mean that the forecasting ability of the inverted yield curve in weeks and months past has been proven to be something less than useful?
In any case, the unemployment rate last month dipped again, down to 4.7% in March, the lowest since July 2001. “Businesses are regaining confidence to the point where they are now actively hiring new workers,” Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group, tells AP via MSNBC.com.
Meanwhile, the economy generated 211,000 new nonfarm payroll jobs last month, which translates into a roughly 1.5% increase in March over February. Although that’s below the stellar days of the late 1990s, it’s near the upper range that’s prevailed in recent years, as the chart below reveals. More importantly, the rate of payroll increase has been holding steady. Below average is one thing; but below average growth that prevails over time adds up to something.
It’s also worth noting that the bulk of the job gains in March came from the service sector, which is by far the largest chunk of the economy. In other words, the main cyclinders of the American jobs machine is firing away.
If the economy’s headed for a slowdown, or worse, the broad labor numbers aren’t betraying much in the way of an early warning sign. Perhaps that’s why the yield on the 10-year Treasury is higher today. As we write this morning, the 10-year Treasury’s current yield is 4.93–the highest since June 2002, according to Barchart.com data.
Perhaps the bigger question is whether the spread in the ten year over the two year is set to widen. Predicting that outcome is on firmer ground these days, if only because the formerly inverted curve of the 10-year/2-year Treasuries has gone flat lately, as the chart below illustrates.
If the economy keeps chugging along, reasonable minds will agree that further adjustment toward a normal yield curve (i.e., one where longer maturities offer materially higher yields relative to shorter ones) is warranted. Nonetheless, what looks reasonable in the 21st century doesn’t always coincide with what Mr. Market ends up delivering.
Copyright 2006 by James Picerno. All rights reserved.