Job Market Gains Look Exhausted

by: Markos Kaminis

With almost any topic, one can take a positive or negative view, and that slant could be affected by the general opinion of the reviewer about that topic. Thursday's Jobless Claims data, like most economic data, offers that same potential. The rate of jobless claims is still not optimal, but on a relative basis, it is certainly better than the last few years' results. However, the pessimist, or maybe the realist who sees what's developing in the global economy today, might say the latest lull in this data point, with claims stuck around the same rate, could indicate the latest improvement trend seen in the labor market is stalling. If that is the case, with the economy potentially stalling or recessing this year on various important factors, then we may have found another inflection point for labor, with a deterioration trend to follow.

Weekly Initial Jobless Claims were reported at 351K in the week ending February 25, down only 2,000 from the prior week. Indeed, the four-week moving average reflects the stall in labor market gains, as it settled in close to the weekly count, at 354K. Several consecutive weeks of claims running at about this rate have had that effect, and the moving average improved 5,500 in the latest period. But is the latest activity indicative of a still improving labor market, or rather reflective of a stall in the rate of improvement? In the event of the latter, perhaps the claims data is telling us something about the economy, which seems to me likely to stall as well this year.

First of all, much of the gains in labor are suspect to begin with. In the past, we talked about the seasonal benefits. We have also discussed in detail the anomaly caused by the drop-off of the long-term unemployed who likely fall off the radar when their extended benefits expire. With the long-term unemployed representing a high percentage of total unemployment, this is likely playing an important role in the latest improvement trend in the unemployment rate, which was last measured at 8.3%. The number of Americans claiming benefits of some sort, including unemployment benefit extension payments, numbered approximately 7.5 million on February 11.

Still, the weekly initial jobless claims data do not include such noise. The data therefore offer an important and clear insight into today's layoff activity, and some insight into the state of labor. With regard to this data point in particular, it's clear now that there's been some improvement in layoff activity. But, we cannot be so sure this is reflective of improved hiring patterns.

The Monster Employment Index ((NYSE:MEI)) measures online job demand, and therefore offers some insight into hiring. The latest report covering January was partly tainted by a seasonal lull, but it offers useful insight anyway. While the MEI dropped to 133 in January, down from 140 in December and 147 in November, it was still 9% higher than last January's 122 mark. Within the data, Monster Worldwide (NYSE: MWW) showed that the public sector continued to shed jobs, but it was the only area that showed contraction in January. Monster commented that transportation and warehousing, retail and wholesale have maintained strong growth trends. That said, the rate of improvement of job demand within manufacturing slowed, falling into the single digits for the first time since February 2011. One might argue that this could be on seasonal issues, as manufacturers shut down plants for maintenance at certain times during the year. But today's ISM Manufacturing Index decline, and this week's Durable Goods Orders drop-off seem to concur with what I interpreted from the Chicago Fed's National Activity Index, which I believe foreshadows economic sluggishness if not recession. Finally, unless it's a Renter Nation you're interested in, then housing is not faring well either, despite the gains that I see shaky in homebuilders' shares.

While relative employment stocks celebrated Thursday, the shares of employment services firms seem to confirm my view of the labor situation generally. The stocks are mostly higher since early October, but indicate a loss of confidence over recent weeks. For instance, looking at the charts of Robert Half International (NYSE: RHI), Korn Ferry (NYSE: KFY) and Kelly Services (Nasdaq: KELYA, Nasdaq: KELYB), we see that trend clearly. Kelly Services is up 42% since October 3, 2011, but down roughly 14% from an intraday high of $18.05 in early February. Robert Half is also up about 42% since early October but down slightly from a recent high. Monster Worldwide breaks the industry trend (with a negative slant), but its shares seem to have diverted from the industry on alpha, or company specific driver.

A critical eye will be required as we receive the monthly labor reports next week. I would advise those inspecting the data to remember that labor is a lagging indicator. The latest developments in Europe, plus costly gasoline prices here at home due to an Iran issue that will not go away soon, weigh heavily on our vulnerable economy this year. As economic growth slows, so should labor activity, despite what the data may tell the optimist today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.