Friday's Jobs Report NOT Overwhelmingly Bullish! Majority of Reports This Week Were Negative!

by The Curmudgeon

The CURMUDGEON has NEVER seen a stock market like this one, which consistently ignores bad economic news while celebrating (often more than once) one or two mildly positive economic reports.

Friday's Labor Department employment report for April is a perfect example of the latter phenomenon.  It showed 165,000 non-farm payroll jobs were created in April, only slightly better than the consensus forecast for 140,000 (155,000 consensus from Briefing.com). The 165,000 number was BELOW the average gain for the past year of 173,000 per month (with private payrolls up an average of 181,000 per month). The market paid no attention to the labor participation rate, which at 63.3% remains at a 33 year low!

Here's what the report stated:

"Total nonfarm payroll (NFP) employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. The number of unemployed persons, at 11.7 million, was also little changed over the month; however, unemployment has decreased by 673,000 since January."

"The civilian labor force participation rate was 63.3 percent in April, unchanged over the month but down from 63.6 percent in January. The employment-population ratio, 58.6 percent, was about unchanged over the month and has shown little movement, on net, over the past year."

In fact, there were several forecasts for a higher rise in nonfarm payrolls than the reported 165,000! So it wasn't really a "positive surprise."

"Private nonfarm payrolls are expected to increase by 178,000 in today's April update from the Labor Department based on The Capital Spectator's average econometric forecast."

The model (nonfarm payroll) forecast for April is 177,000, which is almost unchanged from last month’s revised forecast of 171,000. The Briefing.com consensus estimate for April is 155,000.

In our opinion, the only real positive in the April job report was that the February and March NFP estimates were revised upward by a combined 114,000 jobs. However, the devil was in the details of Friday's employment report and they were not positive for the real economy. Hours per worker declined to 34.4 from 34.6. As a result, total hours worked declined 0.4%, fully reversing last month’s gain. And NFP average hourly wages only ticked up by 4 cents in April, according to the Labor Department.

"It's still an uneven backdrop. Companies are more likely to protect the bottom line and to keep head count relatively steady, at best," said Tom Porcelli, chief U.S. economist at RBC Capital Markets. (Source: Wall Street Journal May 4, 2013) 

"This is a classic 'hold-steady' report -- enough job growth to keep the unemployment rate stable but not much more," EPI's Heidi Sheirholz said in a statement. "In good times, this would be fine, but at a time like this, it represents an ongoing disaster."

Analysis:  Automatic Federal spending cuts (the sequester) that started this March are weighing on private-sector contractors and reducing the incomes of government employees hit by furloughs. Higher payroll taxes on employees and weakness in workers' wages—reflected in Friday's employment report—are exerting pressure on corporate revenue, suggesting slower growth ahead after growth in first-quarter gross domestic product came in at a disappointing 2.5% pace.

The only other positive economic report we could find this week was that the U.S. trade deficit narrowed by more than the consensus estimate:

"The Commerce Department said on Thursday the trade gap narrowed 11.0 percent to $38.8 billion - the second smallest since January 2010."

The implication here is that the smaller-than-expected trade gap could cause the government to revise first quarter GDP higher than the preliminary 2.5% estimate.

The other economic reports this past week, almost all ignored by the market, were a continuation of the dismal reports of the past few months:

-The Commerce Department reported that Factory Orders fell a substantial 4% in March

-The ISM Non-Mfg. Index (services sector) declined from 54.4 in March to 53.1 in April, worse than the consensus forecast.

-Consumer Spending was up only 0.2% in March, the smallest gain in six months.

-The Dallas Fed’s Mfg. Index plunged from +7.4 in March to -15.6 in April.

-The Chicago PMI Index, often a harbinger for the national ISM Mfg. Index, fell from 52.4 in March to 49.0 in April, its lowest level in more than 3 years.

-The ISM Mfg. Index fell to 50.7 in April from 51.3 in March.

-The ADP Monthly Jobs Report showed only 119,000 jobs was created in the private sector in April, a substantial decline from the 158,000 reported for March.

We wonder if any of the bulls actually read the Labor Department's employment report.  If so, what was so good about it?  More importantly, was there really ANYTHING in this week’s heavy schedule of economic reports to vindicate the market’s willingness to ignore the negatives?  Was there anything to justify new all-time highs on the DJI, S&P500?

For the past two or three months, we've seen the market move substantially higher on weak economic reports. How long this can continue is anyone's guess! We remained perplexed, bewildered and baffled!

Till next time.....................................

The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.