05/03/13 Week In Review
Welcome back to OakTree Investment Advisors' Covered Call Week In Review. The big story in the news is today's Jobs Report for the month of April, which has sent the market racing to new highs. As the markets get boosted by the positive economic news, we're here to help summarize the data and take a look at what it really means for the economy.
Total nonfarm payrolls rose by 165,000 in April, dropping the unemployment rate to 7.5% down from March's 7.6%. The payroll additions came with a 7.8% upside surprise as analysts believed only 153,000 jobs to be added in April with an unchanged unemployment rate. Additionally, the jobs report also included healthy upward revisions for February and the disappointing March number. February saw a revision to 332,000 additions up from 268,000, while March saw an actual increase of 138,000 as opposed to initially reported 88,000. All of this contributed to the new highs we saw today for the S&P500 and the Dow Jones Industrial Average, especially since everyone was prepared for a surprise to the downside. The unemployment rate is the lowest since May of 2010.
Let's look at the data a bit closer though. The unemployment rate fell to 7.5%, but would've fallen further if 210,000 people didn't enter the labor force. This is a good sign though, as it shows there some previously discouraged people that are entering the workforce again. The labor participation rate held steady at 63.3% in April, but is down from January's 63.6%.
The majority of the additions for March's revision were the addition of more retail jobs, breaking the blatant weakness that we saw in the industry based on last month's original data. This is wonderful news for the industry, but what is worrisome is the lack of significant additions to the manufacturing and construction industries. Construction saw about 27,000 additions for April, while manufacturing might as well have been flat considering the jump required in the sector in order to get the economy moving at any steam. While the strength of jobs in the retail sector helps explain the resilience of the U.S. consumer this past quarter, the 2% increase in payroll taxes means smaller paychecks and thus a curbing demand for goods. This is what is keeping companies reluctant to hire, as over the past four years they have found the magic formula to being able to perform with fewer and fewer employees allowing them to post higher earnings and margins. These metrics are what have been driving investor excitement in the market (along with dividends and stock buybacks), so there is still not a lot of motivation for businesses to take the risk of expanding and start hiring.
Beyond the lack of industrial and manufacturing sector job additions, what has us still worried is the U-6 unemployment rate. The U-6 unemployment rate is an unemployment rate that factors in the proportion of people in the economy that have given up looking for a job, as well as those people that are only working part time because they can't find full employment. The standard unemployment rate does not factor in these people in its calculation. This is seen by some as a fallacy as these people that have given up looking are 1.) not spending in the same amount as the average American, thus creating a drag on GDP, and 2.) are often an expense on the economy through collecting unemployment benefits and other governmental assistance programs. For April, the U-6 rate actually ticked upwards to 13.9%, a number consistent with what we are seeing in sections of Europe.
So let's look at the data we have. On one hand, the numbers we got today were much better than the expectations set by the markets and the analysts. We also saw a positive revision to previous data that helped regain our confidence that the U.S. economy had not faltered in its recovery. The other hand though still holds the fact that businesses are reluctant about hiring, industrial sectors are still showing nowhere near the growth required to move our economy forward at the preferred rate, and that real unemployment levels as measured by the U-6 rate still remain extremely high. Why, with all this conflicting data then, did we see the markets break into new highs today?
The reason for that is because the data maintains what has, over the past 16 months, been the status quo. The economy is still showing signs that it is staying along its path of slow recovery, yet we are still far from the 6.5% unemployment rate the Fed has set as a goal for its monetary policy. This means that the markets still expect Quantitative Easing to continue for the foreseeable future, and that the "Bernanke Put" or "Fed Floor" will be there to help buoy stock prices up while the economy is finishing up its physical therapy. It might be hard to consider that the monetary policy put forward by the Fed has that strong of an effect on the economy, but look at how the markets sank lower in the middle of the week in expectation of a possible deadline for QE announcement. While the positive surprise of this week's report, amidst a considerably economically-pessimistic market, helped push the markets higher, it is more of a statement of the lack of structurally sound fundamentals beneath stock market gains this year and the influence of the current monetary policy on the decisions of traders and investors.