Sunday, January 6, 2013

Some Thoughts on the Employment Report ...

Even after a very positive ADP data on Thursday, the 'official' report on the state of employment for December released on Friday was merely in-line.  In addition, 30K of that 155K additional NFPs were in construction.  This may appear to be positive, but we believe it may have been driven by the storm Sandy, which certainly does require extensive re-building.

We came across a few interesting things in the household survey data.  It appears that the trend in duration of unemployment is changing course.  While the number of people being unemployed for 27+ weeks declined (some may have left the labor force), unemployment in shorter durations (less than 5 weeks, 5-14 weeks, and 15-26 weeks) increased by an average of nearly 80K in each duration.  Discouraged workers also increased; 89K from the prior month and 123K from Dec. '11.  

Going back to the establishment survey data, we must say that it was positive overall.  Weakness was mostly apparent on the retail side which we think was seasonally driven.  However, it may also indicate lack of confidence regarding consumer spending growth going into the New Year, which includes a slight decline in disposable income for most Americans.  Strength was seen in the education & health services sector which added 65K jobs.  Average weekly hours, and hourly and weekly earnings also increased, slightly.

We thought to take a look at the ISM reports published before December's state of employment.  While manufacturing ISM index finally, and barely, moved above 50.0 (50.7), there was no change in new orders and the production sub-index declined.  With this data in mind, it was good news to see the employment sub-index move up sharply to 52.7 from 48.4 in Nov.  However, we are skeptical that such data may be indicating long-term job growth in manufacturing, as customers' inventories went up sharply (although they remained in contraction mode), and backlog of orders also were contracting (below 50.0), although that particular sub-index did increase by 7.5 points to 48.5.  In addition, a decline in manufacturers’ inventories, combined with the data cited above, backs up our assumption that skepticism regarding the long-run persists among manufacturers, which does cast some doubt on whether that employment sub-index will continue to grow in the coming months.

The non-manufacturing ISM report was also positive regarding the employment dilemma.  That report's employment sub-index shot up 6.0 from the prior month to 56.3, indicating solid growth.  The new orders sub-index also increased, but overall business activities declined slightly.  In addition, backlog of orders went into the contraction mode, below 50.0, while inventories grew.  These figures also cast some doubt on whether or not growth in employment will continue, but for the time being, good news is ... good news.

Overall, while most of the latest economic data showed improvement in the state of employment, we note that political, financial and economic obstacles remain.  And given just how far and quickly the equity market jumped post the so-called fiscal cliff resolution, we could see some profit taking, at least in the short term, in order to create risk-neutral positions going into the additional upcoming political, financial and economic dilemmas. 

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