Friday, November 4, 2011
This morning’s October non-farm payroll report was a tad weaker than expected on the headline basis, but the report’s internals confirm the positive momentum that we have been seeing lately in a number of other economic readings.
I view this report as modestly positive as it adds to the growing list of favorable economic readings that have effectively pushed recession fears to the sidelines. Beyond the U.S. shoare, some light appears to have come out of the dark European clouds as well, with the Greek referendum apparently off the table and last week’s Euro-zone deal back in play. All of this combined should put the market back on the October trend line before the Greece-inspired fears took hold.
The Bureau of Labor Statistics reported the creation of 80K jobs in October, modestly lower than the roughly 90K expectation. Private sector jobs totaled 104K, below the expected 120K level. We also have positive revisions to the prior two months, with 102K in net additions to the originally reported September and August numbers. The unemployment rate ticked down to 9% from 9.1%. Average work week remained unchanged, while average hourly earnings increased 0.2% after increasing at the 0.3% in September.
If we step back from today’s October jobs report and scan the broader economic landscape, we see a clear improving trend in economic readings over the last two months after a period of sub-par performance in the summer months. It is becoming obvious now that the U.S. economy lost momentum in the middle part of the year as it faced high oil prices and disruptions resulting from the Japan disaster. The acrimonious debt debate in the summer and the subsequent rating downgrade further damaged confidence in the recovery.
But the economy made a decent turnaround in the third quarter as the restraining effects of those headwinds started to ease. We saw evidence of that not only in the third quarter GDP report, but also in the relatively high frequency measures of industrial production, consumer spending, and labor market trends. Today’s October jobs report builds on last month’s positive reading and is broadly confirmatory of what we have been seeing lately in the weekly Jobless Claims data.
The big-picture takeaway is that the economic recovery is back on track. This is a big improvement relatively to the double-dip recession fears that were so prevalent in August and September. But the reality is that this growth pace will do little to bring down the nation’s very high unemployment rate. As welcome as monthly job gains in the 120K vicinity are, they are barely enough to meet the incremental additions to the labor market every month. We need significantly more monthly job additions to bring down the unemployment rate.
In corporate news, Groupon (GRPN) shares make their public debut today after the company successfully priced its IPO at $20 a share late Thursday, above the expected $16-$18 range of just a few days back. This gives the company a market value of approximately $13 billion. On the earnings front, we had better than expected results from Starbucks (SBUX) after the close on Thursday. The company also announced a 31% dividend hike and added to its existing buyback program.
Sheraz Mian
Director of Research
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