subject: The Focus Is on Jobs [print this page] The Focus Is on Jobs The Focus Is on Jobs
Earnings Preview 3/25/11
The fourth quarter earnings season is over, but now we are starting to get a few first quarter reports (and a few stragglers for the fourth quarter, many of which are ADRs). That makes for a very light overall earnings week.
A total of just 84 firms are due to report. Just five of those are members of the S&P 500, and all of the reports will be for February fiscal periods, which makes them part of the first quarter. The fourth quarter earnings season was a strong one, and this week should start to provide clues if that will be true for the first quarter as well. The firms reporting this week include: Apollo (APLO), Family Dollar (FDO), CarMax (KMX), Lennar (LEN) and McKesson (MKC).
While it will be a snoozer of a week on the earnings front, the same is not true for economic data. We start the week with Personal Income and Spending, and end it with the all-important employment report. Along the way we also get data on inflation, housing prices and the ISM manufacturing index. Along with the news from overseas, the economic data should be the main focus of the market next week.
Monday
* Personal Income is expected to have increased by 0.3% in February, down from a 1.0% increase in January. Personal Spending is expected to have increased by at 0.5%, up from a 0.2% increase January. The income figure was given a big boost last month by the effects of the cut in the Payroll tax, which will not be repeated. Of course, if spending is rising faster than income, it implies a fall in the savings rate. Over the short term that is a good thing, but in the longer term that is very bad news. In addition to the amount that Personal Income goes up, the data breaks out the sources of that income growth. Over the last few years far too much of that income growth has come from higher transfer payments from the government, and not from higher wages and salaries. That started to change a bit last month, and it would be nice to see more increases in paycheck income. Dividend income will probably rise nicely, but be offset by a fall in interest income due to the ultra-low interest rate environment we are in.
* The Personal Consumption Expenditure core deflator, a broad measure of inflation excluding food and energy prices is expected to have increased by 0.2% in February after rising 0.1% in January. This measure of inflation is closely watched by the Fed. If it comes in as expected, the Fed will remain comfortable keeping Fed Funds near zero and continuing with QE2. Inflation is not the major problem with the economy, high unemployment is.
Tuesday
* The Case-Schiller home price index showed a year-over-year decline of 2.38% in December, and the month-over-month changes in home prices, based on the composite 20 city index have been negative for the last six months. I would expect the downward slide in prices to continue and for the year-over-year change to fall further into negative territory based on the January data on existing home sales and inventories. The consensus is looking for a year-over-year decline of 3.3%, but that might be a bit optimistic. The Case-Schiller index is the gold standard for tracking housing prices, but we are talking about December data here (actually a three-month moving average of October, November and December data) so it tends to be on the stale side. Still, given that housing equity is the primary store of wealth for millions of people, changes in home prices are very significant. They also have a very significant bearing on how much worse the foreclosure situation is going to get. Housing has been the Achilles heel of this economy, and it is not likely to turn around as long as home prices are falling.
* The Consumer Confidence Index is likely to fall from its January reading of 70.4. The consensus is looking for a February reading of 65.0. This is basically a coincident indicator that tends to track unemployment and gasoline prices. I am not a big fan of this indicator, as what consumers say in these surveys does not always match what they actually do.
Wednesday
* We get the appetizer for the employment report in the form of the ADP employment survey. Last month, the ADP report was almost right on the money, but in the previous two months it was far too optimistic relative to the Friday BLS report. The consensus is looking for ADP to report a gain of 210,000 private sector jobs, down slightly from the 217,000 it estimated in February (and the BLS level of 222,000). As the firm that actually cuts the checks of most companies payrolls, ADP is in an excellent position to gauge the strength of the job market. However, its numbers are often quite different than the private sector jobs numbers that are reported by the BLS on Friday. The BLS numbers do tend to be revised in the direction of the ADP numbers.
* Challenger Gray and Christmas, the big outplacement firm will release its tabulation of large layoffs. They were up 20% year over year in January after several months of very sharp declines. I would expect a small decline in March.
Thursday
* Weekly initial claims for unemployment insurance come out. After being extremely erratic over the holidays, they have started to fall significantly, but are still bouncing around a bit. Last week they fell by 5,000 to 382,000. I would expect the downward trend in claims to continue next week. The consensus is looking for a minor increase to 383,000. A level of 382,000 seems pretty good compared to the experience of the last few years. After a huge downtrend from mid-April through the end of 2009, initial claims were locked in a tight "trading range" for most of 2010. We now appear to have broken out of that trading range to the downside. This could well indicate that the economy is about to start producing a significant number of new jobs. The four-week moving average (which smoothes out the week-to-week noise) was under the 400,000 for the fourth week in a row. Historically, that has been an inflection point at which the economy starts to add significant numbers of jobs.
* Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 2,000 to 3.721 million. That is down 947,000 from a year ago. I would expect a further decline this week. The consensus is looking for a level of 3.700 million. Some of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. Those, however, don't last forever either. Federally paid extended claims fell by 12,500 to 4.345 million, and are down by 1.516 million over the last year. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 8.766 million, which is down 187,000,000 from last week (there are some timing issues so the change in continuing and existing claims does not exactly match the change in the total). The total number of people getting benefits is now 2.550 million below year-ago levels. What is not known is how many people have left the extended claims via the road to prosperity, finding a new job, and how many have left on the road to poverty, having simply exhausted even the extended benefits. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
* The Chicago Purchasing Managers Index is expected to dip slightly to 69.5 from 71.2 last month. This is a regional "mini ISM." Like the ISM, any number over 50 indicates expansion, so we are still talking about pretty robust growth, just a bit slower than last month though. Not that significant in and of itself, but it might give a heads up on the ISM number, particularly if there is a big change in it.
Friday
* The most important report of the week is the employment report. In February, payrolls finally started to show some real growth after two months of seriously disappointing. The economy added a total of 192,000 jobs, with 222,000 added in the private sector offset by the loss of 30,000 State and Local Government jobs. Growth should continue in March, but total payrolls will likely again be lower than private sector payrolls, as State and Local governments continue to lay people off to deal with their dismal fiscal situations. Consensus estimates expect total growth of about 185,000 in total and 203,000 on the private side. Revisions to prior month's numbers will also be important, and in recent months they have been upward significantly. The unemployment rate is expected by the consensus to be unchanged from its 8.9% February level. Much of the change in the unemployment rate will depend on the civilian participation rate, was unchanged at 63.2% in February, but has been in a general downtrend. If it continues to decline, the unemployment rate will also decline. If the participation rate starts to rebound, as usually happens in a recovery, the unemployment rate will likely shoot upwards. That would not really be all bad. The key measure will be the percentage of people who are actually working. That was also unchanged at 58.4% in February from 58.3% in January. It is still extremely low by historical standards. The consensus is expecting the report to show that average hourly earnings increased 0.2% in March, after being unchanged in February. The average workweek is expected to tick up to 34.3 hours from 34.2 hours. Over all that adds up fairly solid report. Keep an eye on the duration of unemployment numbers which remain at historically very high levels.
* The ISM manufacturing index is expected remain at the very healthy 61.4 level it hit last month. As a "magic 50" index, that reading would mean that the manufacturing side of the economy is continuing to grow at a very strong pace. In addition to the overall index, pay close attention to how some of the key sub-indexes which cover production, new orders and employment are faring, all of which were above 60 in February, and several were at multi-decade highs.
* Construction Spending fell by 0.7% in January. The consensus is looking for another decline of 0.6% for February. Look for possible revisions to the December number, as well.
* Auto and light truck sales probably continued to accelerate from the 12.7 million seasonally adjusted annual rate they posted in January, that is well over the under 10 million pace at the depths of the Great Recession, but a far cry from the 16 to 17 million annual rates that were the norm before the recession. It will be a very long time before we hit those levels again, but we will continue to see vehicle sales slowly recover. The supply chain disruptions to auto production may affect sales in April, but should not have much effect on the March numbers.
