U.S. Payrolls Improved in October 11/8/13

U.S employers added more jobs than expected in October, suggesting that the U.S economy may have weathered the impact of the 16 day government shutdown better than originally estimated.

American employers added 204,000 jobs in October, exceeding the average forecast of 120,000 by Bloomberg economists.  The September jobs report was also revised higher to a 163,000 gain. 

These improved hiring figures indicate that many companies dismissed the government impasse and maintained their focus on improving earnings growth and increasing sales.

Payrolls at manufacturers increased by the most since February.  Leisure and hospitality sectors had the strongest gain in six months.  Factories added 19,000 workers in October, reflecting in part gains in the automobile industry.  Retailers also started boosting hiring and added 44,000 for the holiday shopping season, which seems to start earlier every year.  The leisure industry climbed 53,000.

A study done by the Boston Consulting Group suggests that manufacturing jobs are coming back to the U.S.  The number of firms that have shifted manufacturing to the U.S. from China, or will do so in the next two years, has nearly doubled over the past 18 months. The survey found the three main drivers of the trend are labor costs, product quality and a desire to be closer to customers. As lower energy prices and declining labor costs make America a cheaper place to manufacture goods, China’s dynamics are also changing. Once a source of cheap labor, the country is seeing their advantage squeezed by rising wage costs and an impending labor shortage. More than 200 U.S.-based manufacturing companies with annual sales topping $1 billion took part in the Boston Consulting Group study.

Although the hiring figures were better than expected, the unemployment rate still rose to 7.3% from the previous reading of 7.2% in September.  However, this increase is attributable to the 800,000 government workers that were furloughed during last month’s government shutdown.  Americans who were not working during the week spanning Oct 6 to Oct 12 were counted in the household survey as unemployed, even if they received, or anticipated getting retroactive pay.

Federal Reserve

The better than expected jobs number may put added pressure on FOMC members to consider tapering their monthly bond purchases in their next FOMC meeting in December.  Financial markets reacted to the better-than-expected jobs report by pushing the 10-year yield higher by 13 basis points to 2.75%.

Federal Reserve policy makers said last week that they need to see more evidence that the economy will continue to improve before they begin to taper their $85 billion in monthly Treasury and mortgage backed security purchases.

The Federal Reserve maintains that they need to see “sustained” improvement in the overall jobs picture before they will begin tapering their bond purchases.  If we continue to see payrolls increasing over 200,000 each month, the Fed will most likely reduce their accommodative stance.   The FOMC is also very cognizant that Fiscal Policy can derail this recovery and they may be patient because Congress has another continuing resolution vote coming up on January 15th to keep the government funded.  The FOMC meets again at the end of January and this will be Ben Bernanke’s last meeting as chairman and Janet Yellen will assume the role thereafter.  Yellen will preside over her first FOMC meeting at the end of March.

In our opinion, it is very unlikely that political leaders will force another government shutdown in January. Neither party can afford to waste more political capital and they will most likely find some middle ground.

The deficit is actually improving, primarily due to economic expansion and the sequester cuts.  Financial markets largely ignored Washington’s dysfunction in October as the S&P 500 actually gained 4.5% in October.  We do not need a “grand bargain” in Washington; we just need them to not cause any more major disruptions.

Corporate Earnings

As of last Friday, 71.4% of U.S. companies reported earnings this season, and initial estimates suggest that S&P 500 companies’ operating earnings will be $26.73 for the third quarter, representing 11.4% year-over-year growth.  Although this is still an early estimate, this value would reflect another consecutive record level of earnings per share for the S&P 500.

Although earnings growth appears to be on pace for a record year, there are still some headwinds that persist and growth is expected to slow in 2014. One major headwind is the increasing value of the U.S. dollar.  As the value of the U.S. dollar increases, the value of foreign profits earned overseas is reduced.

Tailwinds also persist for U.S. stocks.  Globally, economic growth appears to be trending upward which should be a strong catalyst for corporate earnings going forward.  Share buybacks should also help improve EPS growth.  Consumer balance sheets are in good shape, the wealth effect should continue to support consumption, and pockets of pent-up demand still exist.

Earnings multiples suggest that many domestic markets are still not overpriced, but some sectors may be approaching fair value based on empirical valuations.  While we cannot predict a macroeconomic event that could topple this bull market, we maintain that a disciplined investment strategy is still the best way to navigate this uncertain environment.

Exciting News

Please help us congratulate Brad and Emily Combs on the new addition to their family.  Mason David Combs was born this morning at 5:01.  Mom, dad and Mason are all doing great!


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