The widely anticipated employment report for December came in short of expectations that had been elevated by the outsize increase in the ADP survey out at midweek.The 113,000 net new jobs created in the private sector of the U.S. economy last month was respectable enough, especially when the roughly 30,000 per month upward revisions to October and November are taken into account. But it did come up short of the consensus estimate on Wall Street of 180,000 (and rising after ADP’s strong report on Wednesday). As the chart below shows, 18 months into the economic recovery, the current rate of job creation is ahead of where we were coming out of the last recession, although the U.S. job engine clearly has a lot of ground to cover to make up for the 7.5 million jobs destroyed in the 2008-09 recession.
Other aspects of the December 2010 employment report were mixed, but on balance positive: the unemployment rate, both with (16.7%) and without marginally attached and otherwise discouraged workers (9.4%) represented improvement over the November rates (17.0% and 9.8%); aggregate hours worked rose 0.4% for the month and at a 2.4% annual rate for the fourth quarter – a pickup from the Q3 rate of 1.5% (so that with productivity gains, Q4 GDP growth looks to be more than 3%); the youth (16-19) unemployment rate remains unacceptably high at over 25%; and nearly 6.5 million unemployed have been so for more than six months, very little improvement from last May’s record 6.7 million peak.
At midday Friday in New York, the S&P 500 is trading 0.4% lower, ostensibly on the weaker-than-expected jobs report, but that is less than one might have expected given how much it rose on Wednesday when the strong ADP jobs numbers were released. To date in the first week of 2011, the three major U.S. stock market indexes are 0.7% to 1.7% higher. Bonds have generally lost ground so far this year, but Friday’s payroll employment report sent Treasury bond prices higher, particularly in the 5-10 year maturity range, where prices are up roughly two-thirds of a point on the day.
INVESTMENT OUTLOOK…Despite the fourth quarter’s escalation in inflation expectations and bond market volatility, a respectable year-end rally in stocks was fashioned out of improvement in leading economic indicators and, in the United States, perhaps a sense that the two parties in Washington may be able to accomplish something positive in 2011. It is important to remember that at some point the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that are contributing to the quickening seen lately in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and we judge the profits outlook for 2011 to be good. With respect to bonds, we are not completely comfortable with the near unanimity reflected in the markets during the fourth quarter that interest rates can only go higher in 2011; our forecast is for a modest elevation of yields as the year progresses. Stock market volatility has receded from the awful levels of 2008-09, but we would not be surprised if there are occasional bouts of volatility popping up through 2011, although so long as earnings prospects remain favorable the general trend of stock prices figures to be up.
Copyright © 2011 by Wright Investors’ Service, Inc.