The Employment Situation for January

The Bureau of Labor Statistics (BLS) released its January Employment Situation News report last Friday.  The headline figure, the number of new jobs added in the economy, was a disappointing +36,000.

not a great report

Why disappointing?  Two reasons, one economic and one social/political:

–The January figure follows much better results of +93,000 in November and +121,000 in December.  It would have been more comforting had January showed further progress toward macroeconomists’ hoped-for 200,000+ monthly job additions.

–On average, 100,000 people a month finish school or professional training and enter the workforce each month.  So, although it’s good that the economy created 36,000 new positions last month, the number implies the country also produced another 64,000 would-be workers who can’t find jobs.  This adds to the social pressure caused by the fact that about 14 million other Americans are already in the same situation.

the unemployment rate dropped

…to 9% from 9.4%.  That’s because, based on its monthly phone surveys, the BLS estimates the bad weather that swept over much of the country kept just under a million people from getting out to look for work.  Interestingly, the weather was not bad enough to keep people away from the malls last month.  Contrary to cautious analysts’ projections, retail sales for January were up by a surprisingly good +.7%.

the jobs number may not be as bad as it looks

First of all, there’s the weather factor.  The January figures showed big negative swings in transportation and warehousing workers (-86,600 month on month) and in temporary workers (-49,500) that may have been storm-induced.  On the other hand, the manufacturing sector was unusually strong, gaining 49,000 workers, 62,000 of them in durable goods (an area that’s especially weak during recessions and strong in recoveries).

Also, the BLS has just carried out a periodic overhaul of the analytic framework it uses to generate the employment data.  Teething pains, anyone?

In addition, if the recent past is any guide, the 36,000 figure is going to be revised up.  Each monthly figure is redone twice–as new data come in during the following month and the month after that. Recently, all the revisions have been in the plus column.  For example:

–The final November jobs figure is +93,000.  It was initially reported as +39,000  and was revised up to +71,000 in December.

–The December figure was initially reported as +103,000.  It has just been revised up to +121,000.

Wall Street isn’t worried (so far)

Investors remain bullish in the face of the weak job numbers, for several reasons:

–asset allocation shifts.  Some domestic retail investors are starting to reverse their ultra-cautious over-allocation to fixed income and beginning to buy US stocks for the first time in a couple of years.  Others, professionals included here too, having already made a lot of money in emerging markets, are taking profits there and rebuilding their US holdings.

–the expectation of favorable revisions in the jobs data, given other indicators that the US economy is building positive momentum.

–earnings results from publicly traded companies.  These are coming in very strongly, and leading indicators are signalling that more good news is in store.

–the number of people unemployed vs. the number employed.  Although there are still around 14 million people unemployed in the US, or twice the “normal” number, there are over 800,000 more people employed today than a year ago.  In a bull market, and when trying to figure out whether firms will have year over year earnings gains, the latter figure is probably more important to Wall Street.

investment implications

Asset allocation shifts, or what’s sometimes called “the weight of money,” is a transitory phenomenon.  At some point, investors become satisfied with their new portfolio structure and stop making changes.  Then, this influence–at present, favorable for stocks–disappears. So it’s not something to bet the farm on.  Nevertheless, while investors are looking for stocks to buy rather than things to sell, dips in the stocks of underachieving companies may be milder, and the positive response to good news may be more enthusiastic, than one would normally expect.  To me, this means potential trading opportunities over the next couple of months for anyone who already has a reasonably constructed portfolio.

One thing to keep an eye on:

Everyone, me included, is assuming that the BLS figures are simply wrong, that the actual job situation is better than the numbers suggest.  We’re all thinking that when the weather gets better and the BLS shakes out some of the kinks in its system the numbers will end up being in the +150,000-200,000 range.  If they’re not, that realization will likely usher in a period of stormy stock market weather.  Because it would also take away some of the sense of urgency that asset re-allocators are currently feeling, we might have an ugly month or two.