2/3/2012
By Carlos Guillen, Research Analyst

Stocks traded nicely higher for the most part, with the Dow Jones Industrial Average ending up over one percent on Friday. What is apparent is that investors have been compelled out of the sidelines by this morning's highly anticipated jobs report with a force analogous to that of a bat hitting a ball.

Investors have, at least for the moment, forgotten about Europe and have ignored that Orders to U.S. factories came in less than expected. Yes, according to the European Union, Greece's debt reached 159.1 percent of gross domestic product in the third quarter of 2011, approaching the Unions' full-year forecast of 162.8 percent, all while negotiations to address the debt situation get pushed further out in time. And, here at home factory orders rose 1.1 percent in December, less than the Street's estimate of 1.5 percent and less than the 2.2 percent gain in November. However, this morning's jobs data was certainly unexpected, and certainly well received.

According to the latest data from the Department of Labor, the unemployment rate improved in January to a better than expected level. The unemployment rate in January was 8.3 percent, representing the lowest level since January 2009, lower than the 8.5 percent reported in December and lower than the Street's estimate of 8.5 percent. As it can be observed in the chart below, this rate has dropped for seven straight months. In addition, non-farm payroll employment increased by 243,000, higher than the Street's estimate calling for a 155,000 increase.

Clearly, the headline numbers' first impression was very encouraging, but there appear to be some major anomalies. The most notable one was that the Civilian Non-institutional Population increased dramatically by 1.69 million, a spike not seen since January 2003. This had the partial effect of increasing the Not in Labor Force level by 1.18 million. The fact is that there was an update to population estimates, which reflects the results of the 2010 Census. The true effects of the update were an increase of the Civilian Non-institutional Population in December by 1.51 million, the Civilian Labor Force by 258,000, Employment by 216,000, Unemployment by 42,000, and persons not in the labor force by 1.25 million.

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 243,000 jobs while the Streetfs consensus called for a gain of 155,000. While there have be some fluctuations, the economy has been able to consistently add jobs in each of the last 16 month, and for all of 2011, the economy added 1.82 million jobs (revised up from 1.6M), better than the 1.03 million added in 2010 (revised up from 0.94M). This result also came in well above ADP's nonfarm jobs number posted on Wednesday that showed an increase of 170,000 jobs. 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.

All in all, investors are becoming a bit more confident in the direction of employment. It should still be noted that the unemployment rate is still very high, so all is not well, but at least there is some hope.

Carlos Guillen
Wall Street Strategies