The January jobs report came out today and was much stronger than many economists anticipated. Overall, non-farm payrolls increased 257,000 in January as U.S. employers added more jobs than expected last month capping the biggest three-month gain in 17 years . While the headline number exceeded the 228,000 consensus, the big story in today’s report was the revisions. December’s job growth was revised up to 329,000 (from 252,000), and November’s was revised up to 423,000 (from 353,000). The revisions recast November as the one of the best months for job growth in the past two decades. Workers also saw solid gains in their paychecks as hourly average earnings jumped 0.5%, the biggest monthly gain since November 2008.
One of the other components of the report that was very positive for the economy was that average wages were up 2.2% over the past year. However, the unemployment rate climbed to 5.7% as the improving job market lured more Americans into the labor force. This report boosts the Federal Reserve’s position of a minor increase in interest rates by mid-year.
Corporate Earnings Roundup:
As of this morning, 306 companies in the S&P 500 have reported earnings. Of those companies, 73.5% have topped Wall Street expectations, above the 69% average over the last four quarters. A few notable highlights this week were:
Exxon Mobil (XOM) reported a 21% drop in fourth quarter profits as production declines on lower oil prices. The company reported $1.56 per share in profits, surpassing the average analyst estimate of $1.34. Exxon noted that it is making moves to conserve cash, as the company expects oil prices to remain low for some time. The company said it will cut its share buyback program by two-thirds and look for additional ways to cut costs.
Gilead Sciences (GILD) shattered analyst expectations, reporting $2.43 per share in profits for the fourth quarter, easily ahead of the average analyst estimate of $2.23 per share. The company also announced it will initiate a $0.43 per share quarterly dividend, which the company expects to grow over time. Additionally, the company announced they will be buying back an additional $5 Billion in outstanding shares in an effort to maximize shareholder returns. However, Gilead shares fell as they announced that they expect discounts for their Hepatitis C drugs to be around 46% in 2015, much higher than the 25 – 30% range analysts were expecting.
General Motors (GM) surpassed analyst expectations as they reported a 91% increase in its fourth quarter profit. Despite a “rocky” year plagued with vehicle recalls and some bad press, the company reported $1.19 per share in earnings, much higher than the average analyst estimate of $0.83 per share. The company announced they plan on boosting its dividend 20% to $0.36 per quarter. At today’s closing price, this represents a yield of 4%.
Next week we will see several companies reporting earnings. A few notable companies are Coca-Cola (KO), PepsiCo (PEP), Cisco Systems (CSCO), Deere & Company (DE), Express Scripts (ESRX), American Tower (AMT), and Wal-Mart (WMT).
Expect Service Delays due to Understaffed IRS:
As we saw this week with the data breach at Anthem, the number of scams continues to rise as criminals find ways to steal identities. In many cases, they are using this information to file fraudulent tax returns. Between 2008 and 2012 nearly 550,000 taxpayers had their identity stolen and used to file fake tax returns. While the IRS works to make progress in this area, this will be an ongoing battle as scammers create new methods to steal personal information.
Meanwhile, the level of help from the Internal Revenue Service (IRS) deteriorates as budget cuts have led to a significantly understaffed agency. Since 2010 the number of IRS staff devoted to enforcement has dropped 15 percent while the number of tax returns filed annually continue to rise. The proposed 2015 funding level for enforcement is 20 percent below where it was in 2010. Full time employee count has dropped 8 percent in that time and the funding for employee training has fallen 87 percent.
According to the 2014 taxpayer advocate annual report to Congress, over 1/3 of phone calls to the IRS went unanswered and half of all correspondence was not addressed in a timely manner. Wait times for phone calls have gone from under three minutes in 2004 to nearly 18 minutes in 2013. Callers this year are greeted with messages to try again the following week and are encouraged to hang up. This comes at a time when a record number of fraudulent returns are being filed and when filing requirements from the Affordable Care Act take effect. The only way the IRS is helping to mitigate some of this is by stepping up online support for self-service.
Not only has the level of service to taxpayers become impacted, but the level of collection of taxes as well. Per the IRS Oversight Board, it was estimated that nearly $300 billion in payments are missing and have been deemed “uncollectible”. The level of audits is expected to decrease as the agency attempts to move away from aggressive tactics and become more taxpayer “friendly”. Given all this, independent research analysis estimates that every $1 invested in the IRS enforcement sector yields a $6 return in additional revenue from taxes collected.
In addition to all this is the impact it can have for taxpayers expecting tax refunds. Victims of fraud often have had to wait months (an average of 180 days) before they could expect the IRS to resolve the issue and process their return. Going forward it is possible that this may take even longer for the agency to handle these cases. Even those that have not had returns filed fraudulently may have to expect longer refund periods.
What can you do to protect yourself? Safeguard your passwords and personal information as much as possible. Use different passwords and logins and setup security questions as an additional precaution. Scan credit card and bank account statements for suspicious activity. And remember the IRS will never contact you by email, and the first contact will never be by phone (always by mail). Be extremely cautious of suspicious phone calls asking for personal information.
This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.