10/5/2012
By Carlos Guillen, Research Analyst

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Equity markets responded fairly well during today's trading mainly as a result of the government jobs data posted earlier this morning.

As we all know by now, the Department of Labor delivered an unemployment rate of 7.8 percent, landing lower than the Street's consensus of 8.1 percent. After 43 months of clocking an unemployment rate of above 8 percent, September's rate was totally unexpected and brought a momentary sigh of relief. The household survey showed that those employed climbed by 873,000, and those unemployed decreased by 456,000. More encouraging, however, was that those not in the labor force declined by 211,000, all while employing the additional 206,000 individuals that resulted from populations growth. In essence, the jobs market was able to employed a good chunk of those considered unemployed as well as a bit of those not in the labor force, all while employing the incremental population. We should note, however, that a good portion of the increase in employment came as a result of 582,000 individuals that began working part time for economic reasons.

The not so great aspect of the employment report was that non-farm payroll employment in September (derived from the establishment survey) increased by less than expected. The report showed that the increase in non-farm payrolls was 114,000 while the Street's consensus called for a gain of 120,000. This was a bit of a negative surprise given that this past Wednesday, According to ADP, 162,000 private sector jobs were gained during September, which landed higher than the Street's estimate calling for a gain of 133,000 jobs. On the other hand, the nonfarm increments were revised higher for July and August to 181,000 (from 141,000) and 142,000 (from 96,000), respectively. We should also note that during the last 24 months there have been 151,000 jobs added per month, which is the same for the last 12 months. As it stands, we calculate that the economy needs at least 131,000 jobs added monthly just to keep the employment situation constant, so much more is need to bring the unemployment rate to a normal range of 5 to 6 percent.

In all, investors were encouraged with the jobs data as reflected by the nice upturn in equity markets, with the Dow Jones Industrial Average trading higher by as much as 65 points at the peak on the session, but ending up by 35 points. The question now is will this hold next week, probably not. The reality is still that the employment backdrop will not improve for at least the rest of this year and perhaps even into 2013.

Carlos Guillen
Wall Street Strategies