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It's All About Expectations

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Friday, March 7, 2014

Finally a better jobs report, despite all the weather-related distortions. Not only the ‘headline’ tally comes ahead of expectations, but the report’s internals are also pointing in the right direction. We may not have sorted out the weather issue entirely, but this is definitely welcome news.

A total of 175K non-farm jobs were created in the economy, ahead of consensus estimates that had steadily been coming down following Wednesday’s weak jobs tally from payroll processor ADP. Importantly, the tallies for the prior two months were revised higher by a total of 25K, with January going up to 129K (from 113K) and December going up to 84K (from 75K). The private sector added 162K in February, up from 145K in January and 86K in December (the 263K private sector jobs created in February 2013 seem to be from a different era altogether).

A material positive in the report concerns wage gains, which went up +0.4% from January to $24.31 per hour. Average weekly hours ticked down to 34.2 hours, likely a function of weather-related distortions. The relatively fewer jobs created by the goods producing sector (22K in February  vs. 50K in January) are also likely pointing in the weather direction. Of the industries within the goods producing side of the economy, construction jobs were down materially from the month before while manufacturing jobs were essentially unchanged. The unemployment rate ticked up to 6.7% from 6.6% the month before.

The overall ‘level’ of jobs created in February isn’t that much, but what matters for the markets is the level of ‘surprise’ in the report – and the ‘surprise factor’ in today’s report is positive. It’s all relative to expectations and estimates had come down materially in the run up to this report. Expectations for 2014 Q1 GDP estimates have also come down quite a bit in recent weeks, increasing the odds of positive economic surprises down the road. All in all, a favorable backdrop for stocks.

Sheraz Mian
Director of Research

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