Payrolls Increased at a "Measured" Pace

By: Chad Hudson | Thu, Apr 7, 2005
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Last Friday provided a slew of economic data with the March employment report taking top billing. The economy added 110,000 jobs, the lowest number created since July 2004. Economists expected a gain of 213,000 and the lowest estimate was 165,000. A few economists pointed to the household survey that showed a gain of 357,000 workers, but investors clearly took the employment report as a sign that the economy is not overheating. Bond yields continued the decent that started on Tuesday following a weaker consumer confidence report from the Conference Board. Additionally, federal funds futures indicate that traders have reduced the probability of a 50 basis point increase in one of the next two meetings.

While the employment report indicated that the economy cooled down in March, the latest ISM surveys continued to show economic expansion. While the manufacturing ISM dropped one-tenth of a point to 55.2%, it was the 22nd consecutive month that the survey indicated that the manufacturing sector expanded. Every industry, except for paper, reported higher business activity. Adding to inflation fears, the pricing component jumped 7.5 points to 73.0. Steel was the only commodity that was listed as being down in price, but it was also listed as being up in price as well. Thirty-two commodities that were listed as being up in price.

The service side of the economy is also expanding. The non-manufacturing ISM survey increased 3.3 points to 63.1%. None of the seventeen industries in the survey reported that business declined in March. The largest gain was in backlog, which jumped 5.0 points to 56.6. Employment, which surged last month, retracted 2.5 points in March to 57.1. Even though the index declined, the increase in the number of firms that added workers was higher (24% v. 20% last month) than the change in the number that reduced their workforce (9% v. 6%). Prices declined 0.8 points to a still strong 65.6. This was the 13th consecutive month that the prices index was higher than 60. Only 1%, compared to 3% last month, of respondents reported lower prices, compared to 43% that reported higher prices.

Auto sales increased to a 16.8 million annualized rate in March, an increase from the 16.3 million rate last month. It was the Asian automakers that accounted for most of the increase. On an unadjusted basis (there was one more selling day this year) the Asian makers sold 10.8% more vehicles than last year, compared to the 2.3% increase from the domestic makers. First quarter auto sales for the domestic automakers was the slowest since at least 2000.

GM's lackluster performance is more worrisome since it increased incentives almost 10% in March compared to February. The Japanese automakers increased incentives by 3.6, led by Honda's 23.1% gain. Even after this huge increase, its average incentive increased to $1,013, the lowest of any of the major automakers and about one-fourth the size of GM's average incentive ($4,181). The average incentive did decline from a year ago for the domestic automakers. The battle over full-size pickups heated up in March. GM increased its incentive by 10.6% for the Silverado/Sierra models. Not to be outdone the other automakers beefed up their incentives as well. Ford increased incentives by 13.3%, followed by Dodge up 14.4%, Nissan up 15.9%, and Toyota up 18.0%. It appears that GM increased incentives in March on its full size pickups that had been sitting on lots longer than four months. Additionally, GM is throwing another $1,000 at consumers for the next two months if they purchase one of its vehicles.

Alcoa kicked off earnings season on Wednesday, by beating analysts' estimates by a penny. The company reported that sales increased 13%, the highest is four years, most due to higher prices. The company also said that costs such as energy and raw materials are pressuring the company and management is discussing ways to pass through higher costs to its customers. Alcoa noted there was particular strength in its aerospace and commercial vehicle markets with obvious weakness in automotive. The company also noted that Europe remained weak

Earnings growth will decelerate in the first quarter from the torrid pace of the last four quarters. Two groups are having a disproportionate impact on the overall earnings growth for the S&P 500. The energy sector is skewing earnings growth higher and the auto sector is a drag. Overall, analysts are expecting earnings growth of 8.2% for the S&P 500. The energy sector is expected to increase earnings by 39%, while analysts expect the auto sector to have earnings decline. Excluding the gains in energy, the rest of the S&P 500 will only increase earnings by 5%, but the decline in the auto sector is the primary reason. Excluding Ford and GM and earning will increase by 10.5%. So the strength in energy essentially offsets the weakness in the auto sector.

Most retailers will report March same store sales Thursday morning. The ICSC Same store sales are expected to increase by 3.5% to 4.5% in March according to the ICSC. This would be lower than February's 4.9% gain. Analysts point to poor weather in March that likely muted apparel sales, but an earlier Easter will offset. Additionally, February weather was warmer than normal and likely pulled ahead some spring apparel.

Early indications appear that sales were strong in March. On Wednesday, American Eagle Outfitters reported that its same store sale increased 29.2% in March, easily outpacing estimates of 19.9%. The teen apparel retailer also boosted earnings guidance for the current quarter that ends in April. American Eagle now expects to earn 30 to 31 cents per share compared to earlier guidance of 26 to 27 cents and Wall Street estimates of 29 cents.

We have discussed the lack of savings numerous times. A study conducted by Mathew Greenwald & Associates and the Employee Benefit Research Institute was released this week that showed how unprepared workers are for retirement. Fifty-five percent of workers said that their savings were behind schedule. Fifty-three percent think they will only need to save up to $500,000 for retirement, with over 60% of those thinking that $250,000 will be enough. Not surprising, 46% of respondents said they just guessed. Perhaps the most worrisome results were the amount of savings workers have. Across the four age demographics detailed (25-34, 35-44, 45-54, 55+), more than half had less than $50,000 in savings.

Prior to the employment report, investors were concerned that the economy was on the verge of overheating and pushing inflation higher. Investors are hoping that higher commodity price, namely energy, will cause growth to moderate. This would dampen inflation and allow the Fed to stay "measured."


Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis

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