April’s Jobs Number: Cause for Concern?

Source: Thinkstock

Source: Thinkstock

What an interesting morning. Today, May 2, 2014, we saw job growth in the United States increase at its fastest pace in more than two years based on the latest jobs report for April, which suggests a sharp rebound in economic activity, occurred early in the second-quarter. But just how strong was this number? The report showed that non-farm payrolls came in at 288,000, crushing estimates of 211,000. This gain was the largest since January 2012. Further bolstering the positive tone was that both March and February data were revised to show 36,000 more jobs than previously reported.

Employment gains in April were broad-based, with the private sector adding 273,000 jobs and government payrolls rising 15,000. Manufacturing employment increased 12,000 after rising by 7,000 in March. Average hourly earnings were flat in April. The length of the workweek held steady at 34.5 hours last month after bouncing back in March from its winter-depressed levels. Yet, at the time of this writing, both the Dow Jones Industrial ETF (DIA) and the S&P 500 SPDR ETF (SPY) have moved from positive to negative territory.

There are several reasons why there is cause for concern as the report had some glaring negative points. First, although the unemployment rate fell to a 5-year low of 6.3 percent, it is because many workers have simply stopped searching for jobs. Americans who are employed as well as unemployed but looking for a job fell 0.4 percentage point to 62.8 percent. That was the lowest level since last December. Thus, these individuals are no longer counted in the workforce, artificially lowering the rate. The report led to a sell-off in U.S. Treasury debt causing yields to rise sharply. At the same time, the U.S. dollar jumped relative to the euro and yen, while already battered precious metals took yet another hit.

The big question that has led to caution on Wall Street is the role of the Federal Reserve. Stocks have powered higher every time a mediocre jobs number came in, anticipating the Federal Reserve would maintain the status quo. This strong number, while positive for the economy, is spooking investors because the Federal Reserve could start raising benchmark interest rates in just over a year. The Federal Reserve, which has kept interest rates near zero for more than five years, is likely to raise rates as early as June 2015, about six weeks earlier than previously thought according to CME group data. The contracts in CME FedWatch show markets are assigning a roughly 50/50 chance of a first Fed rate hike in June 2015, based on CME FedWatch, which tracks rate hike expectations using the contracts.

Rising interest rates are detrimental across the board for nearly all companies. While it helps banks collect a higher rate from loans and helps savers, it hurts businesses across sectors looking to do capital expenditure programs for research and development and to expand their businesses. Robust growth of business in the last five years has been directly correlated with the availability of so called ‘cheap money,’ that is, borrowing large sums at exceptionally low interest rates. Rising rates will result in decreased activities on these fronts, ultimately harming the bottom line, as well as future earnings potentials. Thus, the sale of stocks, which may come across as an overreaction, may be justified as investors will be willing to pay less for potentially lower earnings power. As a whole, investors need to be aware of the Federal Reserve’s activity with interest rates in order to properly allocate resources to the appropriate sectors.

Disclosure: This article is for informational purposesand is not intended to constitute a recommendation to buy, sell or hold any security. At the time of this writing, Christopher F. Davis is net neutral the overall market, and holds no position in any security mentioned in this article.

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