US Job Market Still Strong

Market tumbles on European worries  
Raul Elizalde - May 5, 2012

Markets took a hit on Friday, May 04, 2012. The DJIA declined over 168 points, the S&P500 lost more than 1.6%, and the NASDAQ tanked almost 2.5%. What prompted this fall?

Before the market opened, the Bureau of Labor Statistics released the “employment situation” report, which includes the latest number of people employed outside of farms (“nonfarm payrolls”). The consensus expectation was for an increase of 154,000, but the release showed an increase of only 115,000.

Media reports were uniformly grim. “US hiring slows, spells trouble for the economy”, “fears alive that the US economy is losing momentum”, “the recovery is fading fast” and “employment woes deepen” were some of the comments found all over the web. Is the job situation really that bad? The answer is a resounding NO. There is no evidence that US hiring has made any kind of turn for the worse. A visual proof should suffice:

The blue line depicts the expectation for the employment data. The dark red line represents what actually came out. Both end up at the same number because, although the latest report came below expectations, previous months were revised higher.

Is there anything here that could justify a market tumble? We don’t think so. The number of employed people in the US is undoubtedly increasing at a steady pace. In fact, we applied a seasonal adjustment filter of our own to the non-adjusted, raw BLS data. Our smoothing (a Hodrick-Prescott filter), like the seasonally adjusted data, reveals no change in the direction of employment either. This reinforces our view that the pace of job gains is firmly on track.

A far more likely reason for the market tumble comes from Europe. On Sunday, France and Greece will have general elections, and both are causing considerable anxiety.

France will have the second and final round of presidential elections. Candidate Francois Hollande, a socialist, has been running ahead of incumbent Nicolas Sarkozy, a conservative, in opinion polls.

The fragile European consensus for austerity measures, imposed to improve fiscal accounts, is fraying under the weight of widespread economic malaise. Mr. Hollande has condemned the fiscal belt-tightening and demanded that growth policies be devised along with the painful adjustments. Given the German dislike for such talk, a possible change of guard in the second largest European economy has raised concerns that political disagreement on common area policies is deepening.

In Greece, polls point to a dismal outlook for Sunday’s election. No political party has the sufficient number of votes to form a viable coalition. This threatens the permanence of tough reforms put in place recently to pave the way for a massive restructuring of the country’s external debt. In fact, the leading contender has suggested that he will seek to renegotiate these reforms, and others have pledged that they will dismantle them if elected. Germany has warned Greeks that they “will have to bear the consequences” if they go down that route. What this ominous statement means is anyone's guess.

Once again, instability in Europe is breeding market uncertainty. That – not the US employment report – is the root of Friday’s weakness. Consensus, in this case, is that both elections will deliver results the market won’t like. How much of it was already priced in on Friday will become clear this coming week.

Raul Elizalde | raul@pathfinancial.net

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