Jobs and Productivity Numbers Beat Estimates, Spur Rally

Multiple reports released by the Department of Labor over the past two days showed that the freeze in the labor market is starting to thaw.  First, on Thursday, initial unemployment claims declined by 29,000 to 469,000.  The four week moving average also decreased, dropping to 470,750 from last week's revised 474,250.  The number of continuing claims also fell, dropping by 134,000 to 4.5 million.  The four week moving average dropped as well, declining by 29,250 to 4.576 million.  This was the lowest number of continuing claims since January 2009.

There were 12 states which saw claims drop by more than 1,000, with California's 12,000 decrease in claims topping the list.  On the downside, seven states, led by New Jersey's 4,879 claims, saw more than 1,000 additional initial claims.

Economists had estimated that there would be 470,000 initial claims, with estimates ranging from 440,000 to 515,000 claims, so the actual number was pretty much right on with the consensus.  The head of economics for Bank of America Merrill Lynch Global Research said that the initial claims numbers indicate that hiring will resume soon.  However, he cautioned that the job market remains in limbo, "where it is not clear if job growth has started yet."  When companies resume hiring, the hiring will likely be "broad based" because companies "overreacted and fired a lot of people, more than they needed to, with the news of the recession."

Adding to the positive news on the jobs front was the release of the Department of Labor's employment situation report on Friday.  The report showed that the unemployment rate remained steady at 9.7 percent.  Employers shed 36.000 jobs in February, a rate that the Department of Labor called "little changed."

Job cuts were spread equally between private sector employers and the government, with each shedding 18,000 jobs.  The construction, transportation, and information sectors were the ones losing the most jobs.  On the plus side, temporary help and health care showed the most growth.  And in a case where a minimal gain was actually a positive, the manufacturing sector showed a very small increase in jobs, following a gain in that sector during January.

It's also important to note that this report was affected by the severe winter storms that paralyzed much of the mid-Atlantic for days.  The report, according to the Department of Labor, used data from the week of February 12.  Thus, it is possible that the storms affected the report.

Economists said that it is likely that the report would have showed a gain in jobs for the first time in years if it wasn't for the severe winter weather.  There's a good chance we're at the turning point for unemployment," said an economics professor at the University of Chicago.  The report showed that the decline in the unemployment rate since October was real, and the "decline was not a statistical anomaly," he added.

The report also showed that some companies are starting to back up their words with actions.  According to human resources consulting company Towers Watson, 92 percent of all employers said they would add to their payrolls in 2010.  While they said they'd do it more slowly than in the past, the employment situation report shows this may be happening.

And in a sign that the growth in jobs is not coming at the expense of productivity, another report from the Department of Labor showed that productivity jumped in the fourth quarter of 2009 by 6.9 percent.  There was a gain in output of 7.6 percent that was partially offset by an increase in hours worked of 0.6 percent.

Inflationary pressures from employees are likely to be kept in check, as unit labor costs fell by 5.9 percent in the fourth quarter of 2009.  This came as a result of productivity increasing by more than compensation.  When compared year over year, unit labor costs declined by 4.7 percent, which was the largest decline since the government started keeping records in 1948.

Productivity was forecast to increase by 6.3 percent according to the consensus estimate.  The estimate for unit labor costs was for a decrease of 4.5 percent.  Estimates for productivity gains ranged from 5.7 to 7.1 percent.

Economists called the gains in productivity unsustainable.  The chief economist at Woodley Park Research in Washington said employers "experienced rising output level without increasing employment to a degree that can't persist."  And a senior economist at PNC Financial in Pittsburgh said "productivity gains will not be sustained because companies are operating at a bare minimum in terms of employment and they will need to start increasing employment to increase output and capture additional revenue."

The combination of the good news on the jobs and productivity front caused a rally in stocks.  For the week, the Dow was up by 2.3 percent to 10,566.  The S&P 500 gained 3.1 percent and closed at 1,139.  And the Nasdaq increased by 3.9 percent to close at 2,326.

In an economic recovery, the last thing to recover is typically the labor market.  This is because companies do not start to hire until they are sure things are improving.  With consumer spending accounting for two thirds of the economy, until consumers think their jobs are secure, they don't really start to open their wallets.  And so, the slow recovery process takes place.

However, the better than expected news on initial claims, payroll losses, unemployment, and productivity bode well for an improved job market.  That is when we'll see the economy start to grow at a better pace.  Still, with 8.4 million jobs lost since the beginning of the recession, even a strong recovery will require years to replace the lost jobs.

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