Sunday, April 08, 2007

March Jobs Report

The March non-farm payroll report was surprisingly strong: a total of 180k jobs were created with 56k in construction and 36k in retail. The gain is corroborated by the ADP number which showed a gain of 106k in private sector jobs. Were the markets open on Friday, it would most likely have been a +1% day.

That said, we need to keep everything in perspective. The gain in construction jobs was clearly due to non-residential construction taking up the slack from residential construction. But with the lag between the two averaging 4-5 quarters, the peak in non-residential construction may not be far behind (given that residential construction peaked in summer of 05). While reports on office rents remain mixed, I couldn’t help but wondering whether one wants to be on the opposite side from Sam Zell and whether the sale of his Equity Office Properties signals anything.

Ahead of the curve – the book

Last September, I reviewed Joseph Ellis’ Ahead of the curve, a book on forecasting business and market cycles. His primary approach was to look at various indicators on a trailing three months, year-over-year change basis, and discern any leading/lagging relationship to known market cycles. Two key findings were

  • Real consumer spending (PCE) is the leading indicator to business/market cycles.
  • Employment is a lagging indicator.

The book contains many fascinating charts, many of which are published and updated on the web (Link). On the topic of employment and market cycles, see charts 11-3, 11-6, and 11-8. The unemployment rate is seen to appear “favorable well after consumer-spending growth has peaked and the bear market has been under way for some time.”

Real consumer spending (as measured by PCE, personal consumption expenditure) is tagged in the book as to be the key driver to market cycles. Chart 8-4 shows that bear market start after real PCE starts to slow. The most up-to-date series is plotted below.

The most recent decrease in the rate of change in PCE started last December, but it’s still at elevated levels. Obviously, the data series itself is far too noisy to be a predictive tool. For that we will have to consult an excellent article from Paul Kasriel of Northern Trust: Recession Imminent? Both the LEI and the KRWI are Flashing Warning. Kasriel makes a cogent argument that we may be at the cusp (not there yet!) of a recession. It is a nice and quick read.

In summary, the March jobs report was exceptionally strong and I’m sure the market will react appropriately. However, it may not be the strong endorsement of future economy that many will believe it to be. In my opinion, the up-coming earnings season and subsequent market reaction will reveal a lot more about the intermediate term market direction than anything else.