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Ahead of Wall Street

Friday, April 5, 2013

The drumbeat of negative economic news continues, with the March non-farm payroll report coming in today significantly weaker than expected. Coming after this week’s weak readings from the ISM surveys and Automatic Data Processing (
(ADP - Analyst Report)), today’s ‘miss’ materially raises the odds that the economy is heading back towards a ‘Spring Swoon’. Such an economic backdrop is simply not consistent with a stock market that was at all-time high levels. What this means is that if the economy is trending down, then look for that same trend to take effect in the stock market as well.

The ‘headline’ March jobs number of 88K came in significantly lower than expectations of about 200K and February’s 268K level (revised higher from 236K). The consensus estimate did not fall much following the weaker than expected report from ADP on Wednesday, though a number of analysts cut their estimates post-ADP and the ‘whisper’ number was reportedly close to 150K.

The revisions trend was positive, with net positive revisions to February and January adding 61K to the total. In a way, the sum of the ‘headline’ 88K and the positive net revisions for the preceding two months takes to the ‘whisper’ number, but that’s hardly any consolation at this stage. Average weekly hours for the private sector ticked up to 34.6 from 34.5, while average hourly earnings were barely up at $23.82 from $23.81. The labor force participation rate went down to 63.3% from 63.5% last month, the lowest level since 1979. And that’s the reason why the unemployment ticked down to 7.6% in March from 7.7% in February.

Private sector jobs totaled 95K in March, down from 254K in February and 148K in January. The government sector shed 7K jobs in the month, with the postal service losing 12K jobs. The private sector gains were concentrated in professional and business services, and healthcare, while retail lost jobs. Professional and business services added 51K jobs in the month, bringing the industry’s 12-month tally to 533K. Construction added 18K jobs in March, confirming the positive housing momentum. Retail’s surprising loss of 24K jobs in March likely reflects the impact of the end of the payroll tax holiday

If the jobs miss was just one report, then it would probably not matter that much. But since it’s coming after other soft readings this week, investors will be justified in concluding that the economic backdrop wasn’t as robust as earlier data suggested. Economic data for January and February was clearly favorable, which prompted many analysts to raise their GDP forecasts for the first quarter to as high as 3.5%. What this week’s data shows is that while those estimates may be a bit on the optimistic side, but extrapolating that trend to the rest of the year is definitely without a basis. This isn’t good for the stock market, but it does ensure that the Fed will remain on its easy money beat.

Sheraz Mian
Director of Research

 

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