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The March non-farm payroll report from last Friday represents the start of a long awaited turnaround in the U.S. labor market. The headline number of 162,000 net jobs created during the month, though below expectations, included 48,000 in census-related temporary government workers and an uncertain number of weather-related jobs. As such, the actual private-sector jobs created during March were significantly less than the headline number would indicate. On a positive note, the job losses for the preceding two months were revised upwards.
But that shouldn't minimize the significance of this jobs report. While we have had a couple of modestly positive monthly jobs numbers in the last few months, largely due to subsequent revisions, the March report is the first 'real' monthly jobs gain. If this trend remains in place over the coming months, as we expect it to, then it would mean an almost 9 months lag for the labor market after the recession ended late last summer. While the GDP recovery to date has been relatively weak by historical standards, it is faster than the last two recoveries in 1991 and 2001. But the payroll turnaround has lagged those recoveries.
Leading Indicators Show Recovery is in Place
Despite the sluggishness of the labor market, there are enough indicators showing that the recovery is firmly in place. The most important of these labor market leading indicators temp positions, length of work week and trends in the household survey all point in the same positive direction.
For the sixth straight month, we added temp positions. The March temp total of 40,200, followed 36,700 and 49,100 in February and January, respectively. Similarly, the average work week ticked up to 34 hours from 33.9 hours in February. The household survey, which is used to determine the unemployment rate, tells a similar story. This survey better captures the self employed and jobs created by new firms. As a result, it typically leads the turnaround in the official payroll series. This survey showed gains of 264,000 in March, which followed gains of 308,000 in February.
These indicators better foretell trends in the labor market than any other indicator. At the upturn of the economic cycle as the demand picture improves, managers increase the work load of existing workers to respond to this happy turn of events. But managers can make existing workers work longer only so much, so they have to bring in temporary workers. And as they get comfortable with this new and elevated level of demand, they start making full-time hirings.
Keeping an Eye on Interest Rates
As we indicated here last week in Interest Rates Take Center Stage, the interest picture has become dynamic. The positive payroll data has pushed the yield on the 10-year bond to within almost 4% (it closed at 3.99% today). The yield briefly moved above 4% intraday, before closing today at 3.99%. This is the highest level for the 10-year yield since mid-October 2008.
While the improving economy is no doubt at play in the higher treasury yields, supply concerns are equally, if not more, to blame. While today's TIPS sale went smoothly, there is plenty of supply in the coming days. The Treasury is set to sell $82 billion in treasury bonds, largely of longer-dated varieties. The less-than-stellar demand for the $118 billion treasury auction two weeks ago made us wary of near-term trends in treasury yields. Not only do these rates have a direct bearing on the borrowing cost of government, but almost all other market participants will experience increasing interest rates in the coming days.
Continued Labor Market Slack to Keep Fed on Hold
So, while these long-term interest rates are on the rise, the one directly in the Fed's control, i.e, the Fed Funds Rate, is expected to remain at current levels at least through the end of 2010.
While the labor market is improving, we have a long way to go before we get anywhere near pre-recessionary levels. We have lost 8.2 million jobs since this downturn started in December 2007. If we add jobs at the monthly average of last month's total (around 160,000 monthly), it will take us four years to get back to pre-recessionary levels. This level of continued slack in the labor market and in the rest of the economy, coupled with the almost complete absence of inflationary pressures, will be forcing the Fed's hand.
We added two stocks last week; one each to the Focus List and Growth & Income Portfolios. There were changes to the Timely Buys list as well.
We added Systemax (SYX), the roughly $850 million market e-commerce electronic retailer, to the Focus List. This niche owner of famous retail brands such as compUSA and Circuit City, which it acquired at bargain basement prices, offers a solid earnings growth profile and still has an attractive value.
We deleted Gafisa (GFA - Snapshot Report) after the Brazilian homebuilder fell to a Zacks #4 Rank ('sell'). Earnings estimates have been trending down in recent days following central bank tightening last month, which is expected to weigh on the domestic real estate market.
We bailed out of Invacare (IVC - Snapshot Report) to lock in a roughly 18% gain in the face of a weakening earnings estimates picture. Locking in gains was a key motive in the exit from the highly-profitable Western Digital (WDC - Analyst Report) position as well. Following the recent downgrade of the stock to a Zacks #3 Rank ('hold') and its roughly sideways move recently, we decided to book the roughly 60% gain in this name.
We deleted Crane (CR - Snapshot Report) from the Growth & Income portfolio after that stock moved to a Zacks #4 Rank ('sell'). We had a nice gain of 24% in this name.