1/6/2012
By Carlos Guillen, Research Analyst

Despite the fact that most Americans are still experiencing rather tough personal economic times, it is becoming more and more apparent that their financial situation is slightly improving. Considering the most recent data from the Department of Labor, we feel a bit more confident that the overall economy is headed in the right direction as more jobs are being generated in a consistent basis. Although the improvements are small, they are nonetheless encouraging taken together. Clearly, more jobs means better consumer confidence, higher spending capacity, greater business expansions and, in turn, more jobs. At the moment this delicate feedback loop is beginning to unravel, with better than expected added jobs, lower than expected unemployment rate, higher average weekly hours, and slightly higher income.

According to the latest data from the Department of Labor, the unemployment rate improved in December to a better than expected level. The unemployment rate in December was 8.5 percent, representing the lowest level since February 2009, lower than the 8.6 percent reported in November and lower than the Street's estimate of 8.7 percent. As it can be observed in the chart below, this rate has dropped for six straight months. Moreover, in 2011 the unemployment rate averaged 8.9 percent, down from 9.6 percent in the previous year. In addition, non-farm payroll employment increased by 200,000, higher than the Street's estimate calling for a 150,000 increase.

It was encouraging to see that the unemployment rate improved mostly as a result of more jobs available as opposed to more people moving out the Civilian Labor Force. In fact, the Employment level increased by 176,000 (to 141M) and the Unemployment level declined by 226,000 (to 13.1M), implying that only about 50,000 individuals moved out of the Civilian Labor Force. On a slightly negative note, the number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 5.6 million and accounted for 42.5 percent of the unemployed.

Perhaps the most surprising aspect of the report was that the change in nonfarm payroll jobs was much better than expected as it showed an increase of 200,000 jobs while the Street's consensus called for a gain of 150,000. While there have been some fluctuations, the economy has been able to consistently add jobs in each of the last 15 months, and for all of 2011, the economy added 1.6 million jobs, better than the 940,000 added in 2010. On the other hand, this result came in well below ADP's nonfarm jobs number posted on Thursday that showed an increase of 325,000 jobs, which was also better than the Street's estimate calling for a gain of 180,000 jobs. Nonetheless, the strong difference between the expected and actual ADP figure was still reflected in the government's data. And we should also note that the strong nonfarm increments coincides with the favorable trend currently occurring with weekly applications for unemployment benefits (four-week moving average) as they have fallen to levels last seen in more than three years.

Another encouraging item for us was that the Employment-population ratio continued to trend higher. Perhaps the improvement was not too significant, but at least it has been consistently heading in the right direction, ramping higher for the fifth consecutive month.

The December jobs report certainly served to strengthen the notion that the employment situation is slowly improving. The average hourly pay increased slightly, providing consumers with a bit more income to spend. In December, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents, or 0.2 percent, to $23.24. Over the past 12 months, average hourly earnings have increased by 2.1 percent. Moreover, the average work week lengthened slightly in December, a sign that business is picking up and companies may soon need more workers. The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.4 hours.

We should note, however, that while we are seeing improvements to the jobs situation, consumers on the street are not quite feeling so great just yet, and it will take more significant improvements to put the consumer at ease. The unemployment rate is still at an unacceptable level, and we estimate that the economy needs to add approximately 125,000 jobs per month (using data for the past ten years) in order to just satisfy worker population growth; and more than that to bring the unemployment rate to normal (5%-6%) historic levels. The economy is still shaky, and at the moment there is still the risk associated with the possibility of not extending the payroll tax holiday. If this tax cut is not extended, all bets are off, and the economy can easily make a turn for the worse.

Carlos Guillen
Wall Street Strategies