Monday Feb. 3 was the first trading day of the month and it looked as if the strong sell-off in January would continue. On Monday alone, the S&P 500 plunged 41 points or 2.3%. So it is really quite remarkable that stocks finished higher for the week. Friday's strong rally was particularly surprising. While futures were pointing toward a strong open on Friday, they turned decidedly negative immediately after the Bureau of Labor Statistics released the disappointing Employment Situation report at 8:30 a.m. For a while, it looked as if we were going to have another strong sell-off.
Most economists had been predicting a gain of about 175,000-180,000 in nonfarm payrolls. The actual gain was a measly 113,000. To their credit, a few economists had warned that the figure could be low due to the extremely cold temperatures in January. They reasoned that the bad weather would take a particularly big toll on outdoor jobs such as those in the construction industry. However, they also argued that investors understood this and, therefore, they would not react badly if payrolls were not as strong as expected.
These economist were partly right. Payrolls were indeed weak and investors did take it all in stride. In fact, once they absorbed the news, investors actually bid stocks higher. The part the economists got wrong, however, was about construction. One of the biggest surprises in the report was that the largest job gains actually came in the construction sector. Despite the fact that the extremely cold weather closed schools and businesses throughout much of the country, construction companies increased headcount by 48,000 in January.
Before you get overly excited about the gains, however, consider this. The actual number of construction jobs fell by 240,000 from December to January. Furthermore, the actual number of nonfarm payrolls fell by 2.87 million. The reported gains of 48,000 in construction and 113,000 in nonfarm payrolls result only once the data is seasonally adjusted.
Of course, there is nothing wrong with seasonally adjusting data when there are known seasonal patterns. This is a useful, time-honored statistical technique designed to reveal underlying trends. Still, I would remain at least a little cautious of what the data is telling us until results come in for the warmer months of April and May.
Furthermore, the employment report revealed that the unemployment rate continued to fall. It fell to 6.6% in January. For the most part, however, recent declines in the unemployment rate have not been due to less unemployment. Instead, they have been the result of more people dropping out of the labor force. Therefore, it was a pleasant surprise to see the opposite occur in January. On a seasonally adjusted basis, the civilian labor force increased by 523,000, the participation rate moved a little higher to 63.0%, and the number of unemployed people fell by 115,000. That's the good news.
Here's the bad news. The actual figures (i.e, figures that are not seasonally adjusted) tell a different story. In actual terms, the labor force declined by 27,000 individuals and the number of unemployed persons increased by 871,000. January's report certainly looks much better on a seasonally adjusted basis than it does without the adjustments. That's okay; yet even with the adjustments, the numbers aren't that good. I suspect Friday's rally had little to do with the employment report. It's much more likely that investors simply decided that the market was oversold on a short-term basis. Still, I would not be surprised to see more weakness-and more buying opportunities-in the weeks ahead.