Limping Into 2013 as Fiscal Headwinds Increase
- The January Payroll Employment Survey showed a gain of 157,000 jobs, a bit below expectations.
- The Unemployment Rate for January increased to 7.9 percent, essentially unchanged for 5 months.
- Average Weekly Hours were unchanged for the month at 34.4. Hourly earnings were up 0.2 percent.
- The ISM Manufacturing Index for January improved to 53.1, better than expected.
- Total Construction Spending in December gained 0.9 percent, led by gains in multifamily and education.
The January labor data is mildly disappointing. Payroll job growth was moderate, but on the low side of consensus, up 157,000. The unemployment rate ticked up to 7.9 percent. Revisions to historical data show modestly better job growth through 2012 than previously estimated. But that does not alter the view that 2012 was another year of muddling through with an economy that was not fully engaged. Weak job gains of only 17,000 for the month in the household survey allowed the unemployment rate to tick up to 7.9 percent, essentially unchanged over the last five months. This poor trend in the unemployment rate may be a positive for equity markets as it extends the likely duration of the Federal Reserve’s highly accommodative monetary policy. The average workweek was unchanged in January at 34.4 hours, and average hourly earnings gained a moderate 0.2 percent. Construction employment gained 28,000 for the month, reflecting ongoing gains in housing starts. Manufacturing gained 4,000 jobs, consistent with improving manufacturing conditions. The bulk of the job gains were spread evenly across major service sectors. Government employment continued to fall, down 9,000 for the month as federal postal workers and local government workers were let go. The data underlying the weak Q4 real GDP growth of -0.1 percent and the mildly disappointing January labor data remain consistent with the view that the U.S. economy limped into 2013 with some momentum in consumer spending, business investment and residential investment. However, the economy remains vulnerable to the increasing headwinds of fiscal tightening. Therefore, the odds of recession for the first half of 2013 remain elevated at 40 percent. Technically, we are already half-way toward fulfilling the working definition of a recession: two consecutive quarters of declining GDP. But that could easily be revised away next month.
The ISM Manufacturing Index for January came in stronger than expected, up to 53.1 percent with most sub-categories positive and improving. Thirteen out of 18 industries reported growth for the month. Construction spending for December was also better than expected, up 0.9 percent for the month.
Market Reaction: U.S. equity markets opened with gains despite (or because of) the increase in the unemployment rate. Treasury bond yields are down. NYMEX crude is down to $97.29/barrel. The dollar is up versus the yen and down against the euro.
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