Slow and steady

Slow and steady. That’s our view of Friday’s payroll report, which showed that employers added 157,000 jobs in January, leaving the unemployment rate unchanged at 7.9%. Although this fell short of economists’ forecasts, the sharp upward revision in the number of jobs created in November and December fueled investor excitement, and that lifted the Dow Jones Industrial Average over the 14,000 mark for the first time since 2007. According to the Bureau of Labor Statistics, the economy added an average of 200,000 jobs over the past three months, well above the 130,000 monthly average seen in April through October. This is impressive, considering we suspect most employers exercised great caution during the final months of the year, given the uncertainty surrounding the fiscal cliff debate in Washington.
The private sector saw payroll additions in retail trade (+33,000), construction (+28,000), health care (+23,000), and wholesale trade (+15,000) sectors. These gains were offset by decreases in transportation and warehousing (-14,000), which shrank following strong seasonal hiring in November and December. Retailers led the hiring pack, as merchants in the automotive, electronics and appliances, and clothing businesses all added jobs. Notably, car dealers and parts retailers added nearly a quarter of the net new retail positions. This is another sign of strength in the automotive sector, which tends to offer a fairly reliable indication of the economy’s pulse. Sales of new vehicles in North America have returned to pre-recession levels, while used vehicle sales are just beginning recover. In a call with investors last week, the CEO of AutoNation, one of the country’s biggest car dealers, conveyed a rosy outlook and said “the auto retail recovery still has many years to run.”

Also noteworthy were the 28,000 jobs added by the construction sector, an indication the housing market is recovering. Since the trough in January 2011, construction employment has grown by 296,000, with one-third of the increase generated in the last 4 months. Still, the level of construction employment remains about 2 million jobs short of the peak in April 2006, a sign the housing rebound has a long runway before a full recovery is achieved.


Federal, state, and local governments shed 9,000 jobs in January. That follows a loss of 6,000 jobs in December. The declines aren’t surprising. Last Wednesday the Commerce Department reported that fourth quarter gross domestic product (value of goods and services produced within the country) fell 0.1%, largely due to a 15% decline in real federal government consumption expenditures and gross investment. Although the decline came as a shock to many economists, the report was overshadowed by strength in consumer spending, which rose at an annualized rate of 2.2%, up from 1.6% in the previous three months. Consumer spending, which represents 70% of the economy, was led by automotive sales.


The closely-watched unemployment rate stands at 7.9% and has held steady since September. While this is below the 10% level hit in October 2009, it’s well above the 4.4% rate in May 2007. The Federal Reserve is targeting an unemployment rate of 6.5%, and has pledged to keep interest rates at record lows until that happens. So, how realistic is this goal? We estimate the 6.5% target can be achieved by December 2014, assuming the economy adds 200,000 jobs per month, or the average witnessed during the past three months. However, if the economy adds just 157,000 jobs per month (as was true in January) we estimate the 6.5% goal won’t be reached until late 2015.