Economy: January 2010 Archives

Dubai, as you know, recently spooked investors.  They were worried that its problems with the $80 billion it took on in debt in order to build itself to a tourism and financial hub would be unpaid.  Some analysts said that Dubai's problems could result in a major sovereign default problem.

So, naturally, Dubai would pull back and cut its spending, right?  After all, having to deal with the embarrassment of having to turn to your wealthy neighbors in Abu Dhabi and begging for a bailout would be humiliating.  So naturally, spending would be restrained going forward.

While that's what a logical person would conclude, it is important to keep in mind that Dubai's legacy is not one of logic.  How else could a country get even a general interest publication like AskMen to highlight their top ten most outrageous projects?  Restraint doesn't seem to be a word in the vocabulary of Dubai's leaders.

So it should come as no surprise that Dubai wants to spend "billions" to expand its airport and to complete construction of another one that's just 25 miles away from its main airport.  Dubai's main airport, Dubai international, had about 41 million passengers pass through it last year.  Its capacity, which is 60 million, will be built up to 75 million with the expansion.  And Dubai won't be done after that expansion, with a push to build capacity to 97 million coming on the heels of the boost to 75 million.

Dubai is also building the Al Maktoum airport, which will have a capacity of 120 million passengers.  The cost of building this airport will be $33 billion.

Analysts at CB Richard Ellis raised concerns over Dubai's airport expansion plans.  "The capacity of the airports and expansions already announced would satisfy Dubai's needs for the foreseeable future," they said.

It seems like Dubai hasn't learned its lesson from its problems last fall.  The humiliation it suffered from its prior debt problems seems to have been forgotten already.  Just looking at the numbers, the total capacity for Dubai's airports would be 217 million passengers.  To put that in perspective, during 2008, there were 809 million airline passengers in all of the United States.

According to the Census Bureau, as of January 31, 2010, the United States has a population of 308 million.  The population of Dubai as of 1.42 million as of 2006.

Even giving Dubai credit for its position as a major transportation hub for the Middle East and its growth, it is difficult to argue that having airports with a capacity for 150 times its population is a logical decision.  The United States isn't a slouch in its importance as a transportation hub, and Dubai would have the capacity to handle about a quarter of total traffic for the United States.

Related articles by Zemanta

• Davos 2010: Will Dubai Be a Drag on Gulf Region? (nytimes.com)

When it comes to economic news today, we could call it a GG day.  And no, we're not talking about Bloomberg's Gigi Stone, although she may be reporting on some of this news.

There has been a lot of concern lately over the sovereign debt of Greece.  Greece's debt has been pounded recently, as speculation over whether or not its deficit reduction measures will allow it to avoid defaulting on its loans.  Greece's finance minister said that the country would "draw blood" with its plan to cut spending and to increase revenue over the next three years.  The country is not contemplating outside help to shore up its financial condition, George Papandreou added.

A big part of this, Papandreou added, would be addressing corruption in Greece.  "I have said let us clean the slate and put in rules and regulations so we move away from this negative legacy. It is not part of our DNA. It may draw blood from us all, but it will create a more credible political system."

And Greece will have to clean up its mess by itself, as the European Union says that it will rely on the country to fix its problems and that there is no alternative plan.  Christine Legarde, France's finance minister, said "Any single member state, France, Germany, Greece, is not alone. We're jointly accountable to each other. [The eurozone] is a monetary zone which holds us together. There's no way out. There's no bail-out system and we have to deliver on the commitments that we made."

The bad news on Greece will be countered by good news on American GDP.  The Commerce Department reported today that GDP rose by 5.7 percent in the fourth quarter.  One indicator beyond the top line number was that spending on equipment and software purchased surged by 13.3 percent.  This, along with Intel's blowout earnings, revenue, and profit margins, seems to indicate that the much anticipated boom in technology is occurring.

The consensus estimate for GDP growth was for an increase of 4.7 percent, with estimates ranging from three percent to 7.5 percent.  The actual increase in GDP was the largest since the third quarter of 2003.

Part of the reason for the increase in GDP was the increase in disposable personal income.  This jumped by 4.8 percent in the fourth quarter, four times the 1.2 percent increase in the third quarter.  Since consumer spending accounts for two thirds of the economy, a growth in disposable personal income is sure to help bolster the economy.

And consumers weren't spending all of their bigger paychecks, as the savings rate ticked up a notch, going to 4.6 percent from the third quarters 4.5 percent.  Keep in mind that for a time during the housing bubble, the savings rate actually dropped below zero for a time.

The GDP news is a positive development.  This seems to give credibility to the Fed's decision to end its quantitative easing as well as its conclusion that the economy is recovering.

Traders may want to establish positions in stocks they've been looking at since they've sold off over the past few weeks.  With the economy showing signs of picking up, the dip may be a good buying opportunity.

The government released two economic reports this morning, and both of them came in below expectations.  The Labor Department released its weekly initial jobless claims data, which showed that initial unemployment claims dropped by 8,000 to 470,000 from last week's revised 478,000.  The moving average, which smooths out the volatility of weekly data, rose by 9,500 from a revised 446,750 to this week's 456,250.

Continuing claims dropped by 57,000 from last week's revised 4,659,000, coming in at 4,602,000.  The four week moving average here dropped as well, falling by 94,250 from last week's revised 4,763,500 to 4,669,250.

On a state level, the news was mostly good, as 30 states reported a drop in claims of more than 1,000.  The leader here was the state of Pennsylvania, which reported a drop of 25,819.  There were three states reporting increases of more than 1,000, lead by California's 43,748.  However, California's increase was due in part to a backlog of claims that the state cleared.

Analysts had expected claims to come in at 450,000, a drop of 32,000 from last week's 482,000 claims.  Projections were for claims to total 400,000 to 480,000, so the actual data was towards the pessimistic side of projections.

An economist at Barclays Capital said that the company expected the labor market "to continue to improve going forward.  The trend in claims has been on a consistent downtrend and we do expect that to continue."  Companies are starting to end layoffs, and some are starting to bring workers back.  That is consistent with a slow improvement in the labor market, which has seen 7.2 million jobs cut since the beginning of the recession in December 2007.

Separately, the Commerce Department reported that orders for durable goods increased by 0.3 percent in December, ending a two month streak of declines.  Excluding the volatile transportation sector, durable goods were up by 0.9 percent.  Analysts had expected durable goods orders to increase by 2.0 percent excluding transportation.

The biggest drop in orders was seen in the non-defense aircraft sector, which nosedived by 38.2 percent.  The largest gain in orders was seen in the defense aircraft and primary metals sectors, which were up by 14.7 and 8.1 percent repspectively.

The increase in durable goods orders is good news, as it means that factories will have to hire more workers if there is more demand for these items.  One potential bright spot here was shown by Ford, which recently announced that it would hire around 1,000 workers for a factory in Chicago.

Without jobs growth, there can be no robust recovery.  Thus, the durable goods number is critical to watch, as that directly relates to factory employment.  All in all, the data is positive, but it is still far from the time to pop the cork on the champagne bottle.

As expected, the Federal Reserve announced that it would keep its target interest rate at zero to 0.25 percent.  What traders seized on was the statement by the Fed that rates would remain low for "an extended period" because "inflation is likely to be subdued for some time."  The Fed also added "economic activity has continued to strengthen and that the deterioration in the labor market is abating."

In addition to its interest rate announcement, the Fed said that it would end several programs that purchased securities on the open market.  Many had wondered when the Fed would end its quantitative easing programs, and it's clear that the answer is soon.  Four of the programs will end on February 1, and another one will be wound down with a final auction taking place on March 8.  In a cautionary note, however, the Fed noted that it "is prepared to modify these plans if necessary to support financial stability and economic growth."

There was one dissent among the votes.  The head of the Kansas City Fed, Thomas Hoenig, said that "economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

An executive at Nationwide Insurance in Columbus, Ohio said the actions and comments by the Fed show that it believes the economy "is on the mend."  He added that the dissent by Hoenig was due to Hoenig's view that the economy is entering "a recovery that's picking up speed" and that the Fed will have to act to increase interest rates "faster than the board in Washington thinks."

Another change in the Fed's statement showed that it there is increasing optimism about the economy among its members.  Previously, the Fed had said that the economy is "likely to remain weak for a time."  The language, which had been in place since April 2009, was changed to a statement that "the pace of economic recovery is likely to moderate for some time."

Stocks, which had been down for most of the day, rallied on the Fed's more optimistic assessment of the economy.  The Dow rose by 0.4 percent to 10,236.  The S&P 500 was up by 0.5 percent to 1,098.  And the Nasdaq climbed by 0.8 percent to 2,221.  All of these indices were down before the Fed's announcement, with the Dow off by 0.4 percent before the annoucement.

The more upbeat assessment of the economy by the Fed is good news.  Wells Fargo Advisors in St. Louis said that "the market will like this."  They added that while the Fed is "comfortable with how the economy is progressing, even though they didn't come right out and say that."

Related articles by Zemanta

• A look at Fed's evolving thoughts on the economy (seattletimes.nwsource.com)

As you know, current Treasury Secretary Tim Geithner and the man who had the job before him, Hank Paulson, testified before Congress today on the bailout of AIG.  The testimony, which was prompted by disclosures that the New York Federal Reserve Bank, which Geithner was the president of before he took his job as Treasury Secretary, suggested that AIG not disclose payments to counterparties and how much they paid.

And if you ever were looking to see why we have a disfunctional government and why the tough problems we face never get solved, after watching the testimony and the questions, you now know why.

Representative after respresentative didn't seem to get through their thick skulls that the government acted like it did with AIG because the officials in place didn't think there was another option.  Even after Geithner and Paulson told them time after time that because AIG could not default on its obligations, there was no option to pay anything less than full value.  It was explained to the congressional idiots that any default on any obligation of AIG would have caused a downgrade by the rating agencies.  This, of course, would lead to the need of AIG to post more collateral, thus increasing the amount of money needed to satisfy counterparty claims.

But among politicians, grandstanding is more important than actually discussing facts.  To highlight some of the stupider comments, John Mica, who is under investigation for funnelling funds to a company that his daughter does public relations for, accused Geithner of a cover up. Marcy Kaptur, who is being investigated for taking funds from a lobbying firm and then steering federal money to its clients, tried to insinuate that the AIG bailout was done only to make Goldman Sachs whole.  Darrell Issa called the actions taken by the Fed a "backdoor bailout" for AIG's counterparties, who were owed $62 billion by the company.  Another representative couldn't even pronouce the legislation he was trying to ask about, Glass-Steagall.

This, of course, is idiocy and stupidity and completely blind to the facts.  It highlights the rectal cranial inversion members of both parties suffer from.  As Geither said, "the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses."  After the reaction of the financial system to the failure of Lehman, financial authorities were concerned that the downfall of AIG would be even worse.

Paulson added to this, saying that if AIG had been allowed to fail, the unemployment rate "easily could have risen to the 25 percent level reached in the Great Depression."  Its failure, Paulson said, would have "buckled our financial system and wrought economic havoc on the lives of millions of our citizens."

Furthermore, Kaptur's questions were idiotic because $62 billion, while a decent chunk of change, amounts to less than the $64 billion in shareholder equity on Goldman's books by itself.  Add in the other counterparties and it gets even smaller as a percentage of assets.  While we don't know what kind of a haircut Goldman would have been willing to take on what AIG owed them, we do know that there was one entity that was not allowing any negotiation on the amount owed.  That was the French government.  If Societe Generale was going to get full value, then no other organization was going to accept less.

It is incredible that idiots who cannot balance their own checkbooks or the government's checkbook -- the federal deficit was just projected to come in at $1.4 trillion -- want to question the actions taken by people who actually have a clue about the financial system.  Jokers like Mica, Kaptur, and Issa who couldn't find their own asses with both hands and a flashlight, much less a clue about finances, need to stop grandstanding and instead address the problem.

The problem was that AIG and other companies were left unregulated and allowed to make bets that could bring down the entire financial system without having enough capital to make good on their claims.  That is like letting a homeless drunk come in off the streets in Vegas and placing a bet that could bring down the house.

That is the problem that needs to be addressed. The actions of the government during the fall of 2008, whether it was the TARP, the bailout of AIG, or the forced marriage of Merrill and Bank of America, certainly deserve scrutiny so that we can learn from the mistakes made.  But the grandstanding idiots in Congress never had an alternative to suggest for Geithner and Paulson to comment on.

And since all they want to do is grandstand and show how idiotic and uninformed they are, they need to get out of the way.  Oversight requires intelligence on the part of those doing the overseeing.  From watching the performance of the congressional representatives today, it's clear that's lacking from them.

Related articles by Zemanta

• Tim Geithner Testimony: AIG Bailout Wasn't Intended To Benefit Individual banks (huffingtonpost.com)
• Hank Paulson's Prepared Testimony at Today's AIG Hearing (blogs.wsj.com)

As you know, over the past few days, the markets have plunged on concerns that the Obama administrations proposed restrictions on banks owning hedge funds and private equity firms and proprietary trading.  Adding to the downward pressure was China announcing that it was tightening lending to prevent a bubble from forming.  Bad news about Greek debt and concerns over the ability for other countries in Europe to meet their obligations made things worse.

All this added up to a week where stocks sold off, with the Dow, S&P 500, and Nasdaq all off by around four percent.

There is a lot of nervousness among traders these days.  How else could you explain a sell off in Intel's stock despite their beat on earnings, revenue, and margins?  Bans on proprietary trading have nothing to do with Intel, which is clearly on a roll and is a market leader, but the stock slumped anyway.

And there is a lot of economic data for traders to react to this week.  The week opens with a report on existing home sales for December.  These are expected to drop sharply, as many acted to take advantage of the original expiration date of the $8,000 tax credit on November 30.  On Tuesday, reports on consumer confidence, as well as the Case-Shiller home price index will be released.  Wednesday brings the release of the Fed's decision on interest rates as well as new home sales data.  Then on Thursday, we'll get the initial jobless claims report from the Labor Department, as well as data on durable goods orders.  The week closes out with data on GDP, the employment cost index, and consumer sentiment.

Quite a bit in there that can move markets.  However, as they say in informercials, but wait, there's more.  And while the more in informercials is often something that's just a throw in, the more here is far from it.

Ben Bernanke's term expires in a week.  The Senate has to determine whether or not to appoint him to a second term.  This appeared to be a done deal until very recently, with only fringe players like Jim Bunning from Kentucky, who appears to have been beaned by too many baseballs during his playing career, opposing the appointment of Bernanke to a second term.

However, Barbara Boxer and Russ Feingold have added their names to the list of those who will oppose Bernanke's appointment.  While the most likely outcome is still for Bernanke to get a second term, the announcement from these two democrats added to the nervousness of traders.

If you think last week was bad for the markets, just watch and see what happens if the Senate doesn't cure its case of rectal cranial inversion and vote to give Bernanke a second term.  Look out below.

Related articles by Zemanta

• The Week Ahead: What's in Store for Us in World Markets? (seekingalpha.com)
• White House still believes Bernanke gets 2nd term (seattletimes.nwsource.com)

The Labor Department reported today that initial unemployment claims increased by 36,000 to 482,000.  This was the highest level in two months.  The four week moving average, which had been trending down, also increased.  This number increased by 7,000 to 448,250.  The number of people collecting unemployment claims fell to 4,599,000, a decrease of 18,000.  Here, the four week moving average decreased by 109,750 to 4,860,250.

The increase in claims was unexpected, but the Labor Department said that much of it was due to the holiday season creating a backlog in filings.  "It is not an economic thing -- it is an administrative thing," a spokesman for the Labor Department said.

It took time for the government to process claims that had built up after the Christmas and New Year's holidays, the Labor Department said.  Thus, the numbers from the prior two weeks may have been understated.  The backlog in claims has been addressed, and thus the number of claims is likely to fall next week.

Five states reported a decrease in claims of more than 1,000, led by Oregon's drop of 5,784.  There were 30 states that showed an increase of more than 1,000 claims, with California's 16,160.  Several of the states showing increases noted that a return to a regular workweek was a factor in the increase.

Analysts had expected initial claims to come in at 440,000, with estimates ranging from 430,000 to 457,000.  Thus, the claims number was higher than even the most pessimistic estimate.  It is important to keep in mind the claims figure was affected by the holiday season, however, when looking at these numbers.

An economist with MF Global in New York said that "the trend in employment is still towards improvement.  This level of claims is still associated with net declines in payrolls, but the message is that declines are getting smaller and smaller."  Companies are reacting to the largest jump in sales in two decades and a return to economic growth by slowing the pace of layoffs after they shed 7.2 million jobs during the recession.

However, questions remain as to when the labor market will pick up.  Many are concerned that a rebound in hiring is going to be slow to occur.  This is one reason why many predict that the unemployment rate will average ten percent for the year.

The economy is in a classic Catch 22.  Consumers and businesses are likely to continue to shed debt until they are confident the economy is recovering.  A big influence on consumers is going to be the labor market.  And employers won't step up hiring until they see a recovery in consumer spending.

Investors need to keep this in mind as they make their trades.

The government gave investors a wake up call this morning, with two negative economic reports.  The Labor Department reported that initial jobless claims increased last week by a more than expected 11,000, to 444,000 from last week's revised figure of 433,000.  The four week moving average, which smooths out the volatility of the weekly figures, dropped by 9,000 from last week's revised number to 440,750.  That number is the lowest the four week moving average has been since August 2008, which predated the bankruptcy filing of Lehman Brothers.  Initial claims have dropped by 34 percent since their high in March of 674,000.

Continuing claims also fell during the week, down by 211,000 to 4.596 million.  The four week moving average here dropped to 4.855 million, a decrease of 151,500.

There were six states with a decrease of more than 1,000 claims, led by Illinois which reported that 6.928 fewer people filed initial claims due to fewer layoffs in the construction, trade, and manufacturing industries.  On the down side, there were 18 states which reported an increase of more than 1,000 claims.  New York topped this list, reporting that 22,810 more people filed initial claims.  Layoffs in the construction, service, and transportation industries pushed claims higher in New York.

The consensus forecast for initial claims was for a rise of 3,000, with estimates for claims ranging from 400,000 to 450,000, so the actual number came in at slightly higher than the midpoint for claims.

Analysts at MF Global in New York said that "the trend in jobless claims has been down," which "implies the labor market is improving."  Starwood Hotels said that "companies are driving their top line again" and getting on the road.  This "not only benefits their business, but spurs job creation."

Another report from the Commerce Department showed that retail sales dropped by 0.3 percent from November's revised figure.  However, December's sales were 5.4 percent higher than last year's figures, which came on the heels of the near implosion of the financial system.  And the November figures were revised upwards from a gain of 1.3 percent to a gain of 1.8 percent.

Gains were seen in the sporting goods, hobby, book, and music stores sector as well as non-store retailers, gasoline stations, furniture and home furnishing, and health and personal care stoes.  The gain was 1.6 percent in the sporting goods sector.  Decreases were led by the electronics and appliance store sector, which fell 2.6 percent.  Other sectors seeing decreases were motor vehicles and parts dealers, building material and garden supplies, food and beverage, clothing and clothing accessories, general merchandise, miscellaneous, and food and drinking establishments.

Moody's Economy.com said that the latest figures show that "we'll see weak gains in spending over the next six months" because "people are still anxious."  Another contributing factor to the drop in sales may have been the blizzard that hit much of the east coast on the weekend before Christmas, which is normally the busiest shopping period for retailers.

All told, the data shows that the economy, while definitely doing better than it has in the recent past, is not out of the woods yet.  It's recovering, but it's got a long way to go before it returns to strong growth.

The current earnings season started off on a sour note, as the first Dow component to report, Alcoa, disappointed.  After the close of markets on January 11, Alcoa reported earnings of a penny per share in the fourth quarter.  Analysts had expected the company to earn six cents a share.  The company said that rising energy costs hurt its earnings, but traders weren't willing to listen.  On the day after Alcoa reported, its stock suffered the worst pounding since March of last year, when the markets were hitting their multi-year lows.  The stock dropped 11 percent.

Also adding to the downward pressure on stocks was a report that China was requiring its banks to hold more capital, thus reducing the amount of money available for loans.  China's actions came in response to concerns that a bubble was inflating due to a very aggressive stimulus program put in place by its government.  Concerns over slowing growth in China hurt companies like Caterpillar, which saw its stock drop by about three percent.

All of the major indices ended up in the red, with the Dow falling by 0.3 percent to 10,627.  The S&P 500 was off by 0.9 percent to 1,136.  The Nasdaq slumped by 1.3 percent to 2,282.  The drop ended a six day winning streak for stocks.

Analysts said that those who were fearful that stocks had come too far too fast had their concerns heightened by Alcoa's earnings.  In addition, the actions of China put "pressure on raw materials stocks as people look at it as a real engine for global growth," Security Global Investors in New York said.  The company added that China's actions also raised the question "about when central banks will start to tighten."

Harris Private Bank in Chicago added that "any hint of [China] looking to restrain their economy is going to infect real nervousness into our markets."

Alcoa's disappointing earnings show the problems that are still facing the economy as it recovers from the worst recession since the Great Depression.  Companies are using cost cutting as a way to boost their earnings, but they can only cut expenses so much.  Last week's payroll numbers show that employers are still reluctant to hire.  Given this, it is hard to envision how companies will meet the earnings projections analysts have assigned to them.

Even if companies met those projections, the S&P 500 is close to fair value.  With Alcoa's earnings serving as a warning shot across the bow of investors, how stocks will react to the potential torrent of disappointing earnings is something that needs to be on the mind of investors.

As many of you know, Japan's economy imploded after the collapse of a real estate bubble in the 1990s.  Many Japanese refer to those who started working after that bubble burst as the lost generation because their career prospects are nowhere near what their parents were.

Now a researcher at the Nomura Research Institute is warning the United States against making the same mistakes Japan made.  Richard Koo, chief economist for the Nomura Research Institute, says that the United States has a "disease" and it is the same one that Japan caught 15 years ago.  He says that the treatment for the disease thus far is the same as what Japan did, with the central bank cutting interest rates to zero and using quantitative easing to flood the system with liquidity.  When this happens, the system is supposed to respond.  But unemployment remains stubbornly high and the economy is growing slowly.

Koo says this is due to "a balance sheet recession."  This occurs, Koo says, when companies shift their focus from profits to debt.  They are doing this because all of the assets they purchased with debt are losing value but they are still carrying that debt so "their balance sheets are under water."  And much like a homeowner whose house is under water, they are deleveraging and trying to shed debt so that they can repair their balance sheets.

Koo's solution?  More borrowing and spending by the government.  "When the private sector is completely absent and paying down debt at zero interest rates...the only way the government can turn this economy around is to do the opposite of the private sector -- borrow the money and spend it."  Koo adds "that's what saved Japan from entering a Great Depression."

For the deficit hawks, and we include ourselves among them, Koo has a warning.  "During the past 15 years, we in Japan tried to cut the budget deficit twice.  On both occasions, the economy collapsed."

"If you say it's political suicide [to run big deficits], not doing it will be an even bigger suicide."

Koo says that U.S. government's response to what he terms a balance sheet recession has so far been "a bit too cautious."  He says that the stimulus program, while a good start, "has to be in there in a sustained fashion to take this entire excess savings in the private sector and put that back into the income stream."  Thus, the stimulus, which will mostly end by the middle of the current year, "has to be sustained until private sector deleveraging is over."

And he has some advice for the President.  Obama, he says, needs to come out and explain to the public that we are facing a different problem right now and that a three to five year program of government spending is needed.  With the "fundamental problem of the U.S. housing market collapse still with us" Koo sees the need for a stimulus of around $500 billion depending on conditions.

Koo's comments are sure to be controversial.  Many have said that government spending and borrowing is likely to cause inflation.  However, there aren't really any signs of inflation right now, and economists are concerned about deflation.

Thus, while inflating the deficit is never something to be taken lightly, his comments should be considered in the context of what happened in Japan and his study of it.

The Labor Department reported that December payrolls dropped by 85,000 and the unemployment rate remained unchanged at 10 percent.  The 85,000 drop in payrolls followed a revised 4,000 gain in payrolls during November.  Employment in the construction, manufacturing, and wholesale trade sectors dropped.  This was partially offset by a gain in the temporary help and health care sectors.

In December, there were 53,000 construction jobs lost during the month.  Manufacturers shed 27,000 jobs, and wholesale trade employers laid off 18,000 workers.  Employers in the health care sector added 22,000 jobs.  In a sign that employment may be ready to recover, the temporary work sector increased by 47,000.  A gain in that sector often indicates that employers are hiring temporary workers to fill their positions until they are sure the economy is recovering.

The average workweek held steady at 33.2 hours per week, and manufacturing hours worked stayed the same as well, at 40.4 hours.  Overtime in the manufacturing sector also remained flat at 3.4 hours.

The average worker got a little more in his paycheck, as the average hourly wage increased by three cents to $18.80.  During the past year, the average hourly wage increased by 2.2 percent but their weekly paychecks increased by only 1.9 percent as they worked fewer hours.

December payrolls fell short of expectations.  The consensus estimate was for payrolls to remain unchanged, with estimates ranging from a loss of 100,000 to a gain of 85,000.  The unemployment range was predicted to remain unchanged, with estimates ranging from 9.9 to 10.2 percent.  Thus, the jobs number was towards the pessimistic side of estimates and the unemployment rate was right at the consensus.

Daiwa Securities in New York said that the latest jobs report indicates "caution in hiring for businesses.  There were some positive things in the revisions to the prior month, but in general we're still in adjustment mode in the labor market."

Given the lower than expected payrolls number, it's unlikely that the Fed will have any impetus to move interest rates.  The Fed generally doesn't start to raise interest rates until the labor market starts to pick up, and with employers still shedding jobs, they will likely keep rates at near zero for the near future.

The Labor Department reported that weekly initial unemployment claims rose to 434,000, an increase of 1,000 from last week's revised 433,000.  The four week moving average, which smooths out the volatility of week to week claims, fell by 10,250 to 450,250 from last week's revised 460,500.  Continuing claims also fell, decreasing by 179,000 to 4,802,000.  That four week moving average also declined to 5,005,750, down by 95,250.

There were 12 states which had declines of more than 1,000 claims, led by California's 23,160 drop in claims.  However, California's decline was driven in part due to a shorter workweek on the part of the offices accepting claims, so that number should be looked at as an outlier.  Even California reported that there were fewer layoffs in the construction and service industries, however.

On the flip side, 14 states reported an increase in claims of more than 1,000.  Here, the list was led by Tennessee, which said that the increase in claims was due to additional layoffs in the manufacturing sector.

The consensus estimate for initial claims was for an increase of 7,000 to 439,000.  Estimates ranged from 400,000 to 455,000, so the actual number came in at about the midpoint of estimates.

Analysts at IDEAglobal in New York said that the jobs data "is clearly a strong number" and that it's likely there will be "slow and steady improvement and a return to positive payroll numbers."  Challenger, Grey, & Christmas, a placement firm based in Chicago, said that planned terminations dropped by 73 percent in December.

The improving initial claims numbers are consistent with an economy that's slowly returning to creating more jobs than are lost.  However, the economy is not out of the woods yet, and investors need to remember that it will take years before the economy generates enough jobs to return to the employment levels we saw before the recession.

The Federal Reserve released the minutes from its December meeting today.  As you know, the Fed said that it would keep interest rates at extraordinarily low levels for some time.  That was expected, but what investors were looking for were hints on what the Fed saw for the economy.

By looking over the minutes, we can see that the Fed believes that "conditions generally had become somewhat more supportive of economic growth" between November and December.  They believe that they can slow down the purchases of mortgage backed securities and approved doing this with an unanimous vote.

Furthermore, the Fed believes that "the recovery in economic activity was gaining momentum. The pace of job losses slowed noticeably in recent months, and total hours worked increased in November."  However, they noted that unemployment levels "remained quite elevated."

Also noted by the Fed was the pace of industrial production increasing in October and November, with consumer durables and materials leading the way.  Consumer spending also increased at a pace the Fed called "solid" and the increases were "broad based."

In addition, the staff of the Fed increased its forecast for economic growth for the second half of 2009 as well as for 2010 and 2011.

"Better-than-expected data on employment, consumer spending, home sales, and
industrial production received during the intermeeting period pointed to a somewhat stronger increase in real GDP in the current quarter than had previously been projected. In addition, the positive signal from the incoming data, along with the sizable upward revisions to household income in earlier quarters and more supportive financial market conditions, led to small upward adjustments to projected growth in real GDP over the rest of the forecast period. The staff again anticipated that the recovery would strengthen in 2010 and 2011, supported by further improvement in financial conditions and household balance sheets, continued recovery
in the housing sector, growing household and business confidence, and accommodative monetary policy, even as the impetus to real activity from fiscal policy diminished."

Analysts said that the Fed's minutes show that it is keeping its options open.  They have a difficult balancing act to perform, they said.  The Fed must allow the recovery to continue to gain strength but they also need to be sure that they unwind the unprecedented injection of liquidity into the system before inflation rears its ugly head.

If the Fed is right, and the economy is starting to pick up steam, they will have to decide when to end the purchases of mortgage backed securities and other debt on the open market as well as when to increase interest rates.  This is going to be a difficult decision to make.  Investors need to watch the Fed's actions as well as their minutes to get insight into what to do.

There's a saying "don't fight the Fed."  That means if the Fed starts to increase interest rates, it's time to move away from early cyclical leaders and towards other stocks.  While we are a long way away from that point, it's something investors should keep in mind.