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Calm Before Sequester Storm?

February Jobs & Productivity: Calm before Sequester Storm?

February 2013 saw a strong jobs performance and a significant decrease in the U-3 broad unemployment measure. Employment increased by 236,000 net new non-farm payrolls. The broad U-S unemployment measure fell from 7.9% to 7.7%. We did see the January 2013 revision remove 38,000 from the previous report, a reduction to +119,000 from +157,000. The U-6 broad measure of unemployment, that includes involuntary part-timers and the discouraged, was stubbornly high in February 2013, falling to 14.3% from 14.4%.

As we enter sequester we must suspect employment and economic weakness to tick higher, all else held equal. In February 2013 the government sector was weak, losing 10,000 net jobs on weakness from states, -8,000 jobs. Construction was a strong contributor to job growth adding 48,000 net new jobs across February. Labor force participation rates continued to be weak and were down slightly overall in February2013. Part of the positive decline in unemployment rate was driven by people dropping out of the labor force. This is consistent with 40% of our unemployed that have been out of work for 27 weeks or longer. Labor force participation among the young remains disturbingly low.

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We have seen rapid rises in productivity and dramatic falls in unit labor costs slow. Output is no longer increasing much faster than hours worked. This tells us that producing more with lower head counts and fewer hours worked - dramatic features of the Great Recession- have decelerated. This suggests that rising profits with stagnant to declining wages and elevated unemployment may have run its course. This is actually positive, as it has contributed to muted labor demand, stagnant wages and long period of weakness in the job market. It will pressure corporate profits going forward.

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February put up strong initial job numbers and significant one month declines in the broad measure of unemployment. We continue to see weakness in wages and employment compared to profits and asset price performance. The slowing of productivity, negative growth in Q4 2012, is likely creating a situation where more hours or employees are required to increase output. This will be supportive to employment and wages if it keeps up. We have had an unusually and fairly savage period for wages and employment opportunities. However, the newer trend, if it holds, suggests that corporate profits may under perform wages and employment.

We remain concerned about the possible fallout from sequester and renewed turbulence in Europe. On the balance, the Q4 productivity report suggests caution about profits and corporate earnings growth. The February Non-farm Payrolls report was strong and suggests we head into the next few difficult weeks stronger than was widely expected.