Naroff Economic Advisors — January Employment Report

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff
President and Chief Economist

INDICATOR: January Employment Report

KEY DATA: Payrolls: +243,000; Private Sector: +257,000; Unemployment Rate: 8.3% (down 0.2 percentage point)

IN A NUTSHELL: “The economy is starting to turn the corner and the labor market is finally becoming a beneficiary of the improving economic conditions.”

WHAT IT MEANS: For months the data were coming in stronger than expected but it was not clear that businesses were willing to loosen the hiring strings. Well, that may be changing. Private sector firms hired a ton of new workers in January and the gains were across the board.

We were not just talking about service sector positions, though there were a lot of those. But while retailers added only about 10,000 workers, manufacturers hired an additional 50,000 people. Construction, wholesale trade, health care, transportation, professional services, temporary help and restaurants all joined in on the hiring binge.

There was some weakness in finance and information services. The biggest cutbacks, though, were in the public sector, as usual. Local education is still suffering the largest brunt of the budget cutbacks. With hours worked and wages rising, income should be up solidly as well. That will add to spending power, which is badly needed.

But the really good news was on unemployment front. The unemployment rate hit its lowest level in three years. There have been three consecutive declines of 0.2 percentage point, a drop that is much faster than anyone expected but not likely to be sustained.

In January, the improvement came despite a sharp rise in the labor force. That was offset by a huge increase in the number of people who say they are employed, showing it was the economy not statistics that are driving down the rate. (Note: The unemployment rate and payroll numbers come from a different survey.)

MARKETS AND FED POLICY IMPLICATIONS: This is the first time in a long time I can talk effusively about an employment report. It was strong in all components. Payroll gains were across the board. The unemployment rate decline resulted from rising employment not a declining labor force. Wages rose as did hours worked. What was not to like? Nothing!

Since the bottom was hit in February 2010, the private sector has brought back almost 3.7 million workers. Clearly, the jobless recovery is no longer jobless. Still, can we expect the good news to persist? Maybe not at the pace we saw in January, but conditions are such that solid payroll gains and a slow steady decline in the unemployment rate are likely to continue.

Unemployment claims are low enough to support further declines in the rate. Improving conditions in the manufacturing and services sector as reported by the Institute for Supply Management argue that the payroll increases can be sustained.

We still face the restraints of weak housing and limited credit so don’t expect economic or employment growth to surge. But it is likely we will see at least 2.5 million new jobs created this year. The unemployment rate could go below 8% by the fall. Those are not spectacular numbers but just a few months ago not very many people had that in their forecasts (I did, which is why I am saying that.)

Investors should love this report but Mr. Bernanke should be wondering why he insisted on saying that rates will stay low for another three years. If this labor market improvement continues, that is not likely to happen.

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RE/MAX Connection Realtors is not a licensed financial advisor and is not providing any financial advice. You should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors only is providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.

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April 27, 2011 FOMC Decision/Press Conference

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

April 27, 2011 FOMC Decision/Press Conference

“…the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

This was a very interesting day in the history of the Federal Reserve. There was a usual meeting but then the Fed released its updated forecast and for the first time in its history, the Fed Chairman had a formal press conference. Not surprisingly, not a whole lot of news came out of the new procedures but at least the Fed members are showing they are trying to better inform the public about the reasons and purposes of their policies.

Let’s start with the statement. As expected, rates were kept stable. The economy is hardly in any shape, given the surge in gasoline prices, to absorb a rate change or any indication that a rate change might be on the horizon. The Committee reiterated its view that it “continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” There was also an affirmation of the intention to complete QE2 on schedule. The clear message here is that there are no current expectations that QE3 will be needed.

There was, however, a small change in the description of inflation. The FOMC did acknowledge that “Inflation has picked up in recent months” though it still described commodity price pressures as “transitory”. It advised that “it will pay close attention to the evolution of inflation and inflation expectations.” In addition, the Fed’s estimate of core inflation was raised to a more realistic 1.3% – 1.6% range. The implication is that by the end of the year, core inflation could be about 2%. That is about as high as the members would like to see it given their long range forecast. As for growth, the members reduced their expectations for 2011 and for the next two years, though the adjustments were not large. The Fed members believe inflation will be higher this year and growth will be slower than forecasted in January.

Finally, there was the press conference. The Fed Chairman handled himself in the way expected: He presented his views in an expanded manner but didn’t ruffle any market feathers. He argued the Fed could pick the correct time to start raising rates but stated that the course of the economy would determine the timing. He noted that while short term inflation was a concern, inflation expectations were not rising enough to alter policy. He did comment that with inflation rising, it would be difficult to be more aggressive, so further aggressive actions are not likely, especially if his projection of stable or even falling gasoline prices occurs. He defended the Fed’s policy as it affects the dollar by simply arguing that stronger long term growth, which he believes will happen, would strengthen the dollar in the future. Basically, Mr. Bernanke made no mistakes, added little to what we know but did show, at least to the public, that he understands their concerns and would do the best he could to get the economy and payrolls growing faster.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

March Existing Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: March Existing Home Sales
KEY DATA: Sales: +3.7%; 1-Family: +4.0%; Condos: +1.6%: Median Prices (Year-over-Year): -5.9%

IN A NUTSHELL: “There are some signs of life in the housing market with a lot of it coming from the recycling of distressed homes.”

WHAT IT MEANS: After seeing that new home sales improved, everyone was expecting a solid increase in existing home demand. The National Association of Realtors reported that sales of existing houses did rise a decent amount in March. However, the level of sales is still quite depressed and was off fairly sharply from the March 2010 sales pace. Of course, the government incentives were still in the market at that time but much of the sales burst occurred later in the spring. Still, conditions are getting better as the improvement was spread across most of the nation with only the West posting a modest decline. Investors continue to drive the market and were about 22% of the purchasers in March, up from 19% a year ago. They love those cheap distressed homes, which now make up 40% of the market. Given the tight lending standards cash buyers are more than welcome. To get a Fannie or Freddie loan (which are the only games in town) a borrower has to have a credit score of about 760. With distressed homes a growing proportion of sales, it was not surprising that prices were down pretty sharply over the year. The supply of homes for sale rose for the second consecutive month. I consider that to be a sign that sellers have growing confidence in the market.

MARKETS AND FED POLICY IMPLICATIONS: Home sales are on the rise and the latest data from the Mortgage Bankers Association indicating the mortgage applications is rising is a further indication that the market is slowly improving. That is not to say it is strong or will be strong anytime soon. Still, the weakest link is beginning to put on a touch of muscle and if the trend continues, by year’s end conditions should look a lot better. Indeed, housing is not the biggest threat to the economy: it is oil. If oil prices continue to rise the expansion is not going to gain a whole lot of traction. The economy was changing gears when the price surge hit. Now we are looking at even softer growth during the first half of the year than I had and I was near or at the bottom of most forecasts. If much of the oil rise was uncertainty over supply (a polite phrase for speculation), then we should see a decent unwinding of the increase. That could come this summer and propel the economy forward during the second half of the year. I still expect that to happen. But for now, it is wait and worry about oil as the impact is rising as confidence is falling. That, of course, only reinforces the view that the Fed will complete QE2. As I noted a couple of months ago, the Fed will likely withdraw liquidity through a three stage process: First will be the completion of the quantitative easing with reinvestment of maturing assets and interest continuing. Then they would stop reinvesting. Finally, there would be actual rate hikes. That is a slow process that should start in June with the first rate hike coming at the end of the year.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

February Supply Managers’ Manufacturing Index

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: February Supply Managers’ Manufacturing Index
KEY DATA: ISM (Manufacturing): 61.4 (up 0.6 point)
IN A NUTSHELL: “”Manufacturing continues to soar and that is the best indication that the economy was improving before the oil price spike.”
WHAT IT MEANS: There is still a lot of uncertainty about the state of the economy and that has gotten worse now that oil is hovering around the $100 per barrel level. But at least we can say that conditions were pretty decent before the chaos in North Africa led to the sharp increase in energy. The manufacturing sector continues to expand at a robust pace, according to the National Institute for Supply Management. The February survey of purchasing managers rose a little in February. While the improvement was small, it is the level that is awesome. You have to go back to 1983 when the economy was bouncing back sharply from the back-to-back recessions to see an overall activity index this high. New orders, including exports and imports, are not only strong but they are growing faster. Production is accelerating and backlogs are building as well. As a consequence, firms are hiring new workers to meet the expanding demand. Indeed, the employment index is one of the highest in the sixty three years this index has been compile. On the other hand, cost pressures are building and while a whole variety of commodities were up, there were none that were reported to be down.
MARKETS AND FED POLICY IMPLICATIONS: This is a strong report that under most circumstances would make everyone smile. But the skyrocketing cost of energy is overhanging the economy. Mr. Bernanke chimed in on that issue today indicating he was not that worried about the higher costs unless they were sustained. That makes sense since he is looking well down the road. But in the short run, there is likely to be some easing in consumption but not enough to kill the recovery, only restrain it. The health of the manufacturing sector supports the view that without a long period of very high energy prices, we should get through this crisis. For now, though, it is likely that the first half of this year will be another period of modest recovery. Hopefully, things shake out over the next few months and we can pick up where we left off, that is, with an economy that is poised to change gears.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisiors, and are not providing any financial advise, you should consult with a licensed financial advisior prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com